STATE  TAXATION  OF  PERSONAL 
INCOMES 


BY 

ALZADA  COMSTOCK,  A.  M. 

A  ssociate  Professor  of  Economies 
Mouiu  HoJyoke  College 


SUBMITTED  IN  PARTIAL  FULFILMENT  OF  THE  REQUIREMENTS 

FOR  THE  DEGREE  OF  DOCTOR  OF  PHILOSOPHY 

IN  THE 

FACULTY  OF  POLITICAL  SCIENCE 
COLUMBIA  UNIVERSITY 


NEW  YORK 
1921 


EXCHANGE 


STATE  TAXATION  OF  PERSONAL 
INCOMES 


BY 


ALZADA  COMSTOCK,  A.  M. 

M 
Associate  Professor  of  Economics 

Mount  Holyoke  College 


SUBMITTED  IN  PARTIAL  FULFILMENT  OF  THE  REQUIREMENTS 

FOR  THE  DEGREE  OF  DOCTOR  OF  PHILOSOPHY 

IN  THE 

FACULTY  OF  POLITICAL  SCIENCE 
COLUMBIA  UNIVERSITY 


NEW  YORK 
1921 


PREFACE 

BELIEVING  that  the  fiscal  aspects  of  state  income  taxes 
were  in  danger  of  being  overlooked  in  the  enthusiasm  for 
progressive  income  taxation,  the  writer  made  a  brief  study 
of  the  yield  and  cost  of  these  taxes  early  in  1920.  The 
paper  appeared  as  "  Fiscal  Aspects  of  State  Income  Taxes  " 
in  the  American  Economic  Review  for  June,  1920.  In 
the  present  study  an  attempt  has  been  made  to  present  more 
fully  the  facts  which  represent  the  financial  standing  of 
these  taxes,  together  with  a  description  of  their  background 
and  of  the  manner  in  which  they  operate. 

The  writer  wishes  to  acknowledge  indebtedness,  to  Mr. 
A.  E.  Holcomb  of  the  National  Tax  Association  for  help- 
ful suggestions  and  for  permission  to  reprint  the  material 
in  the  appendices,  to  Mr.  Nils  P.  Haugen,  formerly  chair- 
man of  the  Wisconsin  Tax  Commission  and  to  other  state 
officials  who  have  generously  supplied  information  which 
was  not  available  in  published  reports,  and  especially  to 
Professor  Edwin  R.  A.  Seligman  of  Columbia  University, 
under  whose  direction  the  study  was  carried  on  and  whose 
constructive  criticism  made  its  accomplishment  possible. 

ALZADA  COM  STOCK 

MOUNT  HOLYOKE  COLLEGE,  JUNE  20,  1921. 

5]  S 


L 


TABLE  OF  CONTENTS 


CHAPTER  I 
THE  EVOLUTION  OF  THE  STATE  INCOME  TAX 

1.  Early  faculty  taxes 12 

2.  State  income  taxes  in  the  nineteenth  century 14 

3.  Recent  income  tax  legislation 16 

4.  The  changed  attitude  towards  the  tax 18 

The  development  of  model  income  tax  laws 26 

CHAPTER  II 
THE  WISCONSIN  INCOME  TAX 
History  of  the  legislation 34 

2.  The  financial  history  of  the  tax 45 

3.  The  outlook  for  the  income  tax  in  Wisconsin  .   .  . 50 

CHAPTER  III 
THE  TAXATION  OF  INCOMES  IN  MISSISSIPPI  AND  OKLAHOMA 

1.  The  present  Mississippi  tax 58 

2.  Efforts  to  reform  the  Mississippi  law  • 59 

3.  The  history  of  the  Oklahoma  tax 62 

CHAPTER  IV 
THE  MASSACHUSETTS  INCOME  TAX 

1.  The  earlier  taxation  of  incomes 67 

2.  Financial  results  in  Massachusetts 77 

3.  The  sucess  of  the  income  tax 79 

4.  Present  income  tax  problems  in  Massachusetts 83 

CHAPTER  V 
INCOME  TAXES  IN  MISSOURI  AND  DELAWAKE 

1.  The  Missouri  income  tax 86 

2.  The  Delaware  income  tax 89 

71  7 


8                                   TABLE  OF  CONTENTS  [g 

PACK 

CHAPTER  VI 

INCOME  TAXIS  IN  VIRGINIA,  SOUTH  CAROLINA,  AND  NORTH  CAROLINA 

1.  History  of  the  Virginia  income  tax 93 

2.  The  yield  of  the  tax  in  Virginia 94 

3.  The  repeal  of  the  South  Carolina  income  tax  law 96 

4.  The  taxation  of  incomes  in  North  Carolina 100 

CHAPTER  VII 
THE  NEW  YORK  INCOME  TAX 

1.  The  history  of  the  movement 104 

2.  The  present  income  tax  law in 

3.  The  revenue  from  the  tax 124 

4.  Unsettled  questions 127 

CHAPTER  VIII 

THE  NORTH  DAKOTA  INCOME  TAX 

z.  The  income  tax  law  of  1919 136 

2.  Criticisms  of  the  law  of  1919 138 

3.  The  operation  of  the  income  tax  law 142 

4.  The  future  of  the  income  tax  in  North  Dakota 145 

CHAPTER  IX 

THE  INCOME  TAX  MOVEMENT  IN  NEW  MEXICO  AND  ALABAMA 

1.  The  New  Mexico  income  tax 149 

2.  The  attempt  to  introduce  an  income  tax  in  Alabama 153 

CHAPTER  X 
THE  IKCOME  TAX  MOVEMENT  IN  OTHER  STATES 

1.  Proposals  for  an  income  tax  in  Ohio 156 

2.  The  income  tax  movement  in  Georgia • 160 

3.  The  income  tax  movement  in  California 162 

4.  Other  steps  towards  income  taxes 163 

CHAPTER  XI 

MODERN  INCOME  TAX  METHODS  AND  RESULTS 

1 .  Income  tax  rates 167 

2.  Exemptions  and  deductions 171 

3.  Double  taxation 184 

4.  The  new  type  of  administration 190 

5.  Assessment,  collection,  and  review 193 


9] 


TABLE  OF  CONTENTS 


FACE 

6.  An  assessment  roll  for  the  income  tax  .    .       .  196 

7.  Collection  and  information  at  the  source  197 

8.  The  distribution  of  the  proceeds  of  the  income  tax 201 

9.  Financial  results 205 

10.  Conclusion < ....  206 

APPENDIX  I 

PRELIMINARY  REPORT  OF  THE   COMMITTEE  ON  A  MODEL  SYSTEM 
OF  STATE  AND  LOCAL  TAXATION  ......  208 

APPENDIX  II 

DRAFT  OF  A  MODEL  PERSONAL  INCOME  TAX  LAW       ......  218 

BIBLIOGRAPHY 241 

INDEX 244 


CHAPTER  I 
THE  EVOLUTION  OF  THE  STATE  INCOME  TAX 

IN  the  second  decade  of  the  twentieth  century  personal 
incomes  became  an  important  source  of  public  revenue 
With  the  extraordinary  demands  upon  government  treas- 
uries during  the  period  of  the  European  War  and  the  en- 
larged financial  needs  in  time  of  peace  it  became  necessary 
to  reach  sources  which  were  almost  untouched  before 
the  present  era  of  great  expenditures.  In  modern  indus- 
trial countries,  in  which  the  majority  of  incomes  are 
in  the  form  of  money  and  instruments  of  credit,  such  re- 
sources may  be  found  and  utilized  easily  and  quickly.  The 
productivity  and  elasticity  of  taxes  on  individual  incomes 
made  possible  the  extension  of  existing  systems  of  income 
taxation  as  well  as  successful  experiments  with  new  income 
taxes. 

In  the  United  States  the  state  governments  as  well  as  the 
federal  took  advantage  of  the  elasticity  of  income  taxes  in 
revising  their  tax  systems  to  meet  the  changing  needs  of 
this  period.  The  result,  from  a  critical  and  historical  point 
of  view,  is  an  aggregation  of  examples  of  possible  income 
tax  methods  rather  than  the  development  of  an  American 
income  tax  policy,  for  no  two  state  income  taxes  are  alike, 
even  in  their  essentials.  Moreover,  many  of  the  precedents 
of  method  and  of  administrative  devices  have  been  drawn 
from  European  countries  instead  of  the  American  experi- 
ence of  nearly  three  centuries  of  colonial  and  state  taxation. 
In  spite  of  the  tendency  of  the  states  to  abandon  the  older 
n]  ii 


CHAPTER  I 
THE  EVOLUTION  OF  THE  STATE  INCOME  TAX 

IN  the  second  decade  of  the  twentieth  century  personal 
incomes  became  an  important  source  of  public  revenue 
With  the  extraordinary  demands  upon  government  treas- 
uries during  the  period  of  the  European  War  and  the  en- 
larged financial  needs  in  time  of  peace  it  became  necessary 
to  reach  sources  which  were  almost  untouched  before 
the  present  era  of  great  expenditures.  In  modern  indus- 
trial countries,  in  which  the  majority  of  incomes  are 
in  the  form  of  money  and  instruments  of  credit,  such  re- 
sources may  be  found  and  utilized  easily  and  quickly.  The 
productivity  and  elasticity  of  taxes  on  individual  incomes 
made  possible  the  extension  of  existing  systems  of  income 
taxation  as  well  as  successful  experiments  with  new  income 
taxes. 

In  the  United  States  the  state  governments  as  well  as  the 
federal  took  advantage  of  the  elasticity  of  income  taxes  in 
revising  their  tax  systems  to  meet  the  changing  needs  of 
this  period.  The  result,  from  a  critical  and  historical  point 
of  view,  is  an  aggregation  of  examples  of  possible  income 
tax  methods  rather  than  the  development  of  an  American 
income  tax  policy,  for  no  two  state  income  taxes  are  alike, 
even  in  their  essentials.  Moreover,  many  of  the  precedents 
of  method  and  of  administrative  devices  have  been  drawn 
from  European  countries  instead  of  the  American  experi- 
ence of  nearly  three  centuries  of  colonial  and  state  taxation. 
In  spite  of  the  tendency  of  the  states  to  abandon  the  older 
u]  ii 


12         STATE  TAXATION  OF  PERSONAL  INCOMES          [I2 

legislation  and  to  ignore  its  lessons,  both  constructive  and 
negative,  the  influences  of  the  traditional  tax  systems  per- 
sist, playing  an  almost  unrecognized  part  in  shaping  the 
revenue  systems  of  today.  The  obvious  and  contemporary 
explanations  of  the  present  period  of  income  tax  develop- 
ment are  satisfying  only  when  they  are  illuminated  by 
the  long  history  oif  the  successes  and  failures  o>f  the  attempts 
of  the  states  to  tax  income  and  property. 

i.  Early  faculty  taxes  * 

The  earliest  examples  of  taxes  which  may  be  said  to  be 
the  forerunners  of  the  state  income  taxes  of  today  are  the 
"  ability  "  or  "  faculty  "  taxes  used  in  the  American  colon- 
ies. The  first  reference  to  taxpaying  ability  appears  in  an 
act  passed  in  the  Massachusetts  Bay  Colony  in  1634,  pro- 
viding for  the  assessment  of  each  resident  "  according  to  his 
estate  and  with  consideration  O'f  all  other  his  abilityes  what- 
soever," but  this  provision  appears  to  have  been  interpreted 
as  applying  to  property  only.  Seven  years  later,  in  New 
Plymouth,  "  faculties  and  personal  abilities  "  were  distin- 
guished from  visible  property  for  the  purposes  of  taxation, 
a  distinction  which  was  apparently  maintained  in  the  actual 
assessment  of  the  taxes.  In  1646  a  definition  oi  faculty 
appeared  for  the  first  time,  in  the  order  of  the  Massachusetts 
Bay  Company  that  artisans  and  tradesmen  should  be  as- 
sessed for  their  "returns  and  gains  "  in  the  same  proportion 
as  property-holders  were  assessed  for  "  the  produce  of  their 
estates."  From  this  time  forward  the  principle  of  tax- 
ation according  to  faculty  made  steady  headway  in  the  New 

1  The  principal  sources  of  information!  used  in  summarizing  the  his- 
tory of  income  taxes  up  to  1900  are  Edwin  R.  A.  'Seligman,  The  Income 
Tax  (Revised  ed,  New  York,  1914),  and  'Delos  O.  Kinsman,  The  In- 
come Tax  in  the  Commonwealths  of  the  United  States  (New  York, 
1903). 


!3]  EVOLUTION  OF  THE  STATE  INCOME  TAX  I$ 

England  colonies.  Connecticut  followed  in  1650,  Rhode 
Island  in  1673,  New  Hampshire  in  1719,  and  Vermont  in 
1788.  In  Rhode  Island  alone  the  tax  dropped  out  of  ex- 
istence before  the  outbreak  of  the  Revolution.  In  Mas- 
sachusetts, on  the  other  hand,  the  faculty  taxes  were  util- 
ized during  the  Revolution  for  the  purpose  of  reaching  war 
profits  as  well  as  ordinary  income. 

Outside  of  New  England  the  growth  of  faculty  taxes  was 
slower.  In  New  York  the  tax  failed  to  appear  at  all.  The 
first  indication  of  an  attempt  in  the  middle  or  southern 
colonies  to  apportion  taxes  according  to  faculty  came  in 
New  Jersey  in  1684,  nearly  half  a  century  after  the  begin- 
ning in  New  England.  In  the  course  of  the  eighteenth 
century  five  other  colonies,  Pennsylvania,  Delaware,  Mary- 
land, Virginia,  and  South  Carolina,  undertook  taxation  ac- 
cording to  income  or  profits.  Few  of  these  taxes  survived 
the  economic  changes  of  the  early  national  era.  The  only 
tax  which  continued  with  an  unbroken  record  down  to  the 
modern  period  was  that  of  Massachusetts,  which  gave  way 
to  a  new  income  tax  in  1916. 

Although  the  early  statutes  contain  many  references  to 
"  income,"  the  colonial  faculty  taxes  are  not  to  be  con- 
fused with  the  income  taxes  of  the  present  day.  The 
colonial  taxes  were  rarely  based  on  income  actually  re- 
ceived, but  represented  assessments  of  certain  fixed  amounts 
which  were  determined  in  most  instances  by  the  nature  of 
the  taxpayer's  employment.  For  this  reason  the  faculty 
taxes  soon  came  to  bear  little  relation  to  the  earnings  of  the 
person  assessed,  and  to  become  unequal  and  unjust  in  their 
burden.  As  taxes  on  property  developed  the  faculty  taxes 
appeared  increasingly  arbitrary,  and  they  tended  to  give 
place  to  income  taxes  or  to  drop  out  of  existence. 


I4          STATE  TAXATION  OF  PERSONAL  INCOMES          [14 

2.  State  income  taxes  in  the  nineteenth  century 
The  financial  troubles  of  1837  and  the  following  years 
brought  about  a  fresh  development  in  the  taxation  of  in- 
comes. It  was  not  long  before  the  effects  of  the  great 
crisis  made  themseves  felt  in  the  revenues  of  the  states, 
which  soon  set  about  the  business  of  increasing  their  tax 
receipts.  As  a  result  the  country  entered  upon  a  second 
phase  of  the  state  taxation  oi  incomes,  in  which  the  taxes 
were  levied  upon  income  actually  received  instead  of  upon 
the  assumed  income  or  profits  of  certain  classes  of  tax- 
payers. New  England,  which  was  less  seriously  affected  by 
the  financial  disturbances  oi  the  time,  had  no  share  in  the 
new  income  tax  movement,  but  six  middle  and  southern 
states,  Pennsylvania,  Maryland,  Virginia,  North  Carolina, 
Florida,  and  Alabama,  tried  to  raise  funds  through  income 
taxes  at  this  time. 

If  the  Civil  War  had  not  brought  new  financial  emergen- 
cies, particularly  in  the  affairs  of  the  southern  states,  the 
income  taxes  adopted  during  the  forties  would  probably 
have  been  abandoned.  Only  six,  the  faculty  taxes  of  Mas- 
sachusetts and  South  Carolina,  and  the  newer  income  taxes 
of  Pennsylvania,  Virginia,  North  Carolina,  and  Alabama, 
were  in  existence  when  the  war  broke  out. 

In  the  years  of  the  war  and  the  following  period  of  re- 
construction the  states  turned  again  to  the  income  tax  as  a 
means  of  relief  and  a  source  of  additional  revenue  in  a  time 
of  great  financial  need.  The  tax  was  developed  almost 
wholly  in  the  southern  states,  where  the  demand  for  funds 
was  most  pressing.  The  Massachusetts  and  Pennsylvania 
laws  were  undisturbed.  Four  of  the  southern  states,  Vir- 
ginia, North  Carolina,  South  Carolina,  and  Alabama,  made 
use  of  the  income  tax  systems  already  in  existence  for  the 
production  of  additional  revenue.  Several  other  states 
were  induced  to  make  the  experiment.  Georgia,  Missouri, 


I5]          EVOLUTION  OF  THE  STATE  INCOME  TAX  I5 

Texas,  Louisiana,  West  Virginia,  and  Kentucky  tried  in- 
come taxes  in  various  forms,  'but  all  of  the  taxes  soon  dis- 
appeared with  the  exception  of  that  of  Louisiana,  which 
was  continued  with  negligible  success  until  the  end  of  the 
century.  Meanwhile  the  northern  states,  which,  in  spite  of 
their  heavy  burden,  were  in  far  less  serious  straits,  ne- 
glected the  tax.  State  income  taxes  seemed  to  bear  the 
marks  of  a  last  resort  for  an  over-burdened  government. 

The  lowest  ebb  in  the  history  of  state  income  taxes  was 
reached  in  the  period  1884  to  1897,  The  only  income  taxes 
in  force  during  this  time  were  those  of  Massachusetts,  Vir- 
ginia, North  Carolina,  and  Louisiana.  In  Massachusetts 
and  Louisiana  the  assessment  of  personal  incomes  had 
almost  disappeared,  and  in  Virginia  and  North  'Carolina  the 
yield  was  extremely  small.  In  fact,  the  whole  history  of 
state  income  taxes  from  the  close  of  the  Civil  War  to  the 
introduction  of  a  new  plan  of  taxation  by  Wisconsin  in 
1911  is  almost  entirely  a  record  of  failure.  With  almost 
no  exceptions  the  administration  of  the  laws  was  poor,  the 
yield  small,  and  the  taxes  generally  unpopular.  The  re- 
enactment  of  an  income  tax  law  by  South  Carolina  in  1897 
meant  simply  a  repetition  of  the  old  story.  In  1908  a  sixth 
state,  Oklahoma,  inaugurated  a  tax  along  the  old  lines  from 
which  the  yield  proved  to  be  less  than  $5,000  a  year. 
Meanwhile  the  Louisiana  tax  had  disappeared. 

An  almost  unanswerable  argument  against  an  unwieldy 
and  unpopular  revenue  measure  is  produced  when  it  can  be 
shown  that  it  yields  to  the  state  treasury  only  a  few  thous- 
ands of  dollars  annually, — hardly  more  than  the  cost  of  its 
collection  if  administrative  machinery  of  any  importance  is 
required.  Such  an  amount  becomes  almost  microscopic 
when  it  is  placed  on  the  ten-  and  hundred-million  dollar 
scale  to  which  state  business  has  grown  during  the  last  few 
years.  Students  O'f  taxation  became  extremely  sceptical 


!6         STATE  TAXATION  OF  PERSONAL  INCOMES          [16 

of  the  success  of  state  income  taxes  under  any  form  of  ad- 
ministration yet  devised.  The  justice  of  the  taxation  of 
incomes  was  rarely  questioned,  but  the  practical  difficulties 
of  framing  and  administering  a  tax  law  which  would  apply 
equitably  to  income  from  various  sources  appeared  insur- 
mountable. 

3.  Recent  income  tax  legislation 

At  the  beginning  of  191 1  income  tax  laws  were  in  force 
in  only  five  states, — Massachusetts,  North  Carolina,  South 
Caro1ina;  Virginia,  and  Oklahoma.  The  Massachusetts 
tax  was  irregularly  and  unevenly  enforced  and  was  of  no 
importance  in  the  fiscal  system  of  the  state.  In  South 
Carolina  and  even  in  North  Carolina  the  officials  and  the 
taxpayers  resented  the  difficulties  of  collecting  the  taxes 
under  the  existing  system  and  pointed  to  the  small  revenue 
as  proof  of  the  inadequacy  of  the  tax.  The  Oklahoma 
measure  was  regarded  as  a  failure  by  the  state  officials.  In 
Virginia  alone  the  income  tax,  which  had  risen  to  a  yield  of 
$130,000  by  1911,  was  regarded  as  a  productive  and  valu- 
able part  of  the  state  revenue  system.  The  complete  aban- 
donment of  this  form  oi  taxation  by  the  states  appeared  to 
be  only  a  matter  of  time. 

'Meanwhile  an  opposing  tendency,  for  a  long  time  unre- 
cognized, was  making  itself  felt  in  the  continued  efforts  to 
reform  the  general  property  tax  which  were  being  made 
throughout  the  United  States.  The  personal  property  tax 
in  particular,  because  oi  its  inadequacy  and  its  increasingly 
unjust  and  pernicious  results,  was  receiving  more  and  more 
criticism.  The  states  found  themselves  ready  to  experi- 
ment with  classified  property  taxes,  with  inheritance,  and 
even  with  income  taxes,  as  possible  avenues  of  relief  from 
the  unsatisfactory  state  of  affairs  in  which  the  fiscal  system 
of  nearly  every  state  was  found. 


I7]          EVOLUTION  OF  THE  STATE  INCOME  TAX  17 

As  a  result  of  the  general  and  persistent  attempts  to  im- 
prove state  revenue  systems  the  movement  for  the  taxation 
of  incomes  spread  until  at  the  close  of  1920  n  states  had 
laws  taxing  personal  incomes.     The  first  indication  of  the 
changing  point  of  view  regarding  state  income  taxes  was 
given  by  the  passage  of  an  income  tax  law  in  Wisconsin  in 
1911.     According    to    the    terms    of    this    law    a    heavy 
graduated  tax  was  impo^d  upon  the  incomes  of  individuals 
and  corporations  from  sources  within  the  state.     In  1912 
Mississippi  followed  with  a  law  modelled  after  the  older 
type  of  state  income-tax  legislation.     In  1915  Oklahoma 
made  a  fundamental  revision  of  the  law  taxing  incomes, 
following  out  some  of  the  ideas  which  had  proved  workable 
in  Wisconsin.     Massachusetts  passed  an  entirely  new  in- 
come tax  law,  of  wide  scope,  in  1916,  thereby  abolishing  the 
old  income  tax  system  which  had  survived  from  the  period 
of  colonial  "  faculty  "  taxes.  Two  experiments  on  a  smaller 
scale  were  made  in  1917  when  Missouri  and  Delaware  en- 
acted personal  income  tax  laws.     Virginia  revised  the  state 
income  tax  law  in   1918,  but  without  making  important 
changes.     The  same  year  saw  the  only  repeal  of  an  in- 
come tax  law  of  any  permanence  which  occurred  during 
the  decade:  South  Carolina  abolished  the  state  income  tax 
system  and  attempted  to  find  no  substitute  for  it.     The 
year  1919  was  one  of  unusual  activity  in  the  field  of  income 
taxes.     New    York,    North   Dakota,    New    Mexico,    and 
Alabama  passed  laws  taxing  personal  incomes,  and  North 
Carolina  made  important  revisions  in  the  existing  law. 
The  New  York  income  tax,  on  account  of  the  size  of  the 
incomes  reached,  appeared  likely  to  prove  the  most  sig- 
nificant  in   the  history  of   income   tax  legislation.     The 
New  Mexico  law  was  saved  from  repeal  in  1920  only  by 
the  governor's  veto.     The  Alabama  law  was  declared  un- 
constitutional early  in  1920.     At  the  close  of  1920  the  list 


!8         STATE  TAXATION  OF  PERSONAL  INCOMES 

of  states  taxing  personal  incomes  *  stood  as  follows :  Dela- 
ware, Massachusetts,  Mississippi,  Missouri,  New  Mexico, 
New  York,  North  'Carolina,  North  Dakota,  Oklahoma, 
Virginia,  and  Wisconsin. 

4.  The  changed  attitude  towards  the  tax 

In  the  ten  years  which  have  passed  since  the  income  tax 
was  adopted  in  Wisconsin  the  at||tude  of  the  best-known 
authorities  has  changed  from  scepticism  to  a  tentative  ap- 
proval. Before  1911  the  question  of  interest  to  students 
of  taxation  was  not  so  much  one  of  the  possible  success  of 
state  income  taxes,  for  their  elimination  seemed  only  a 
question  of  time,  but  the  underlying  reasons  for  the  con- 
sistency of  the  failures.  In  the  light  of  our  present  know- 
ledge it  appears  that  the  methods  of  administration  of  the 
tax,  while  seized  upon  by  the  more  critical  observers,  were 
not  sufficiently  analyzed.  In  the  first  detailed  study  of 
state  income  taxes,  made  by  Mr.  Kinsman  and  published  in 
1903,  the  failure  was  laid  at  the  door  of  administration, 
on  four  counts : 2 

The  experience  of  the  states  with  the  income  tax  warrants  the 
conclusion  that  the  tax,  as  employed  by  them,  has  been  unques- 

1  The  plan  of  taxing  the  net  income  of  corporations  without  corres- 
pondingly taxing  the  incomes  of  individuals  (had  meanwhile  been 
adopted  by  Connecticut  (Laws  of  1915,  ch.  292),  Montana  (Laws  of 
7917,  ch.  79),  and  West  Virginia  (Laws  of  1915,  ch.  3).  In  Connecticut 
the  original  tax  was  two  per  cent,  in  Montana  one  per  cent,  and  in 
West  Virginia  one-half  of  one  per  cent.  Before  1919  New  York,  with 
a  three  per  cent  tax  on  the  net  incomes  of  manufacturing  and  mercan- 
tile corporations,  was  included  in  this  group.  These  states  took  advan- 
tage of  the  use  of  federal  forms  and  the  dates  and  machinery  of  the 
collection  of  the  federal  taxes,  and  found  that  the  extremely  low  cost 
of  collection  was  a  distinct  advantage  of  corporation  taxes  collected  in 
this  way.  A  number  of  other  states  taxed  the  incomes  of  certain 
specified  classes  of  corporations. 

1  Kinsman,  op.  cit.,  pp.  116,  117,  120,  121. 


I0]          EVOLUTION  OF  THE  STATE  INCOME  TAX  IO/ 

tionably  a  failure.  It  has  satisfied  neither  the  demands  for  justice 
nor  the  need  of  revenue.  The  question  arises :  Is  this  failure  due 
to  qualities  inherent  in  the  nature  of  the  tax,  or  is  it  the  result  of 
conditions  which  may  be  removed  ?  One  of  the  fundamental  prin- 
ciples of  taxation  is  that  the  subjects  of  a  state  ought  to  contribute 
to  the  support  of  the  government  in  proportion  to  their  respective 
abilities,  and  it  is  generally  agreed  that  these  abilities  are  best 
measured  by  income.  Therefore,  theoretically  at  least,  an  income 
tax  is  unquestionably  the  fairest  system  yet  proposed.  .  .  . 

While  much  of  the  legislation  in  the  states  relative  to  the  in- 
come tax  has  been  very  unsatisfactory,  often  not  appealing  to  the 
taxpayers'  sense  of  justice  and  furnishing  excuses  for  the  conceal- 
ment of  property,  nevertheless  laws  have  been  passed  repeatedly 
which,  if  properly  administered,  would  have  distributed  the  burden 
with  unusual  justice.  But  these  laws  have  failed  quite  as  com- 
pletely as  those  with  provisions  less  satisfactory.  The  failure  of 
the  tax,  therefore,  can  not  have  been  due  to  the  ill  success  of  the 
laws  in  embodying  the  principle.  .  .  . 

As  the  result  of  our  study  we  conclude  that  the  state  income  tax 
has  been  a  failure,  due  to  the  failure  of  administration,  which,  in 
turn,  may  be  attributed  to  four  causes — the  method  of  self -assess- 
ment, the  indifference  of  state  officials,  the  persistent  effort  of  the 
taxpayers  to  evade  the  tax,  and  the  nature  of  the  income.  The 
tax  can  not  be  successful  so  long  as  taxpayers  desirous  of  evading 
taxation  are  given  the  right  of  self -assessment.  Since  all.  attempts 
to  change  the  method  of  self -assessment  have  failed  and  the  nature 
of  industry  in  the  states  is  at  present  such  as  to  make  impossible 
the  assessment  of  a  general  income  tax  at  the  source,  we  are  forced 
to  the  conclusion  that,  even  though  no  constitutional  questions 
should  arise,  failure  will  continue  to  accompany  the  tax  until  our 
industrial  system  takes  on  such  form  as  to  make  possible  the  use 
of  some  method  other  than  self -assessment. 

Writing  six  years  later  Mr.  Kinsman  noted  a  positive 
movement  in  the  direction  of  the  state  taxation  of  personal 
incomes  which  escaped  several  of  the  students  of  that 
period.  The  movement  was  to  have  far-reaching  effects  in 
the  next  decade,  but  up  to  1909  it  had  not  shown  itself  in 
the  passage  of  income  tax  legislation.  The  several  reports 


20         STATE  TAXATION  OF  PERSONAL  INCOMES          [2o 

of  state  tax  commissions  and  other  interested  agencies  and 
individuals  against  the  tax  were  signs  of  interest  in  the 
device  which  were  not  to  be  disregarded.  Moreover,  the 
amendment  to  the  Wisconsin  constitution  permitting  the 
passage  of  an  income  tax  law  had  already  been  adopted. 
Mr.  Kinsman  restated  his  position  as  follows:1 

A  study  of  the  present  period  of  income  tax  activity  .  .  .  affords 
the  author  no  occasion  to  modify  conclusions  previously  expressed. 
The  current  movement  is  not  due  to  the  success  of  the  tax  in  any 
state,  but  rather  to  the  spirit  of  reform  now  sweeping  the  country. 
This  movement  would  hardly  leave  untouched  the  subject  of  taxa- 
tion, where  injustice  is  so  common.  The  people  have  turned  to  an 
income  tax  because  they  believe  in  the  theory  that  individuals 
should  contribute  to  the  support  of  the  government  according  to 
ability,  and  that  income  is  the  most  just  measure  of  that  ability. 
They  expect  success  because  they  are  possessed  of  the  character- 
istic American  optimism,  and  know  little  of  the  difficulties  of  ad- 
ministering such  a  law. 

Mr.  K.  K.  Kennan,2  writing  in  Wisconsin  in  1910, 
quoted  with  evident  approbation  passages  from  Mr.  Kins- 
man's description  of  the  difficulties  of  administering  state 
income  taxes,  and  added  the  following  comment : 3I 

It  is  a  common  remark  that  income  tax  laws  are  all  right,  but  that 
they  do  not  work  in  practice.  Certainly  the  experiences  of  those 
states  which  have  passed  such  laws  are  not  encouraging,  but  is  it 
not  possible  that  the  fault  lies  with  the  crude  and  imperfect  ad- 
ministrative methods  which  have  thus  far  been  employed? 

In  the  comprehensive  volume  on  the  income  tax  first 

1  D.  O.  Kinsman,  "  The  Present  Period  of  Income  Tax  Activity  in 
the  American  States,"  Quarterly  Journal  of  Economics,  vol.  xxiii  (Feb., 
1909),  pp.  296-306. 

a  Mr.  Kennan  was  later  given  the  task  of  organizing  and  supervising 
the  work  of  the  income  tax  districts  in  Wisconsin. 

3  K.  K.  Kennan,  Income  Taxation  (Milwaukee,  1910),  pp.  235,  236,  323. 


2i]          EVOLUTION  OF  THE  STATE  INCOME  TAX  2I 

published  in  1911  Professor  E.  R.  A.  Seligman  character- 
ized Mr.  Kinsman's  statements  concerning  the  defects  of 
the  administration  of  the  state  income  tax  laws  as  "  unques- 
tionably true"  and  enumerated  other  difficulties,  such  as 
that  of  the  localization  of  income,  which  must  always  be 
met  in  working  out  a  state  income  tax  law.1  Together  with 
several  other  tax  experts,  Professor  Seligman  was  en- 
gaged at  this  time  in  working  out  the  terms  of  a  possible 
federal  income  tax  law,  and  he  was  undoubtedly  influenced 
both  by  the  realization  of  the  impracticability  of  efforts  to 
install  successful  state  systems  at  a  time  when  the  federal1 
system  was  still  undetermined  and  by  a  conviction  of  the 
prime  importance  of  a  workable  federal  system.  In  1914 
Professor  Seligman  commented  on  the  success  of  the  "  im- 
proved and  centralized  administrative  methods  "  which  had 
been  so  sucessfully  used  in  the  assessment  and  collection 
of  the  income  tax  in  Wisconsin,  but  continued  to  express 
doubts  as  to  the  workability  of  income  tax  laws  for  all  the 
states.2  By  1915,  when  the  federal  tax  was  in  operation 
and  its  successful  working  guaranteed,  he  was  a  supporter 
of  the  project  of  a  state  income  tax  for  New  York. 

During  the  same  period  various  criticisms  and  a  general 
dissatisfaction  with  state  income  taxes  had  been  expressed 
in  various  official  reports.  One  of  the  most  widely  read 
of  these  was  the  Report  of  the  Massachusetts  Commission 
on  Taxation  of  1897,  in  which  the  existing  law  of  Massa- 
chusetts was  shown  to  be  wholly  unsatisfactory  in  its  opera- 
tion,3 and  the  whole  question  of  the  administration  of  state 
income  taxes  was  described  as  an  exceedingly  difficult  one. 

1  Seligman,  op.  cit.,  pp.  426-429. 

*  Seligman,  op.  cit.,  p.  429. 

'  (Massachusetts  Commission  Appointed  to  Inquire  into  the  Expediency 
of  Revising  and  Amending  the  Laws  of  the  Commonwealth  Relating  to 
Taxation,  Report,  1897. 


22         STATE  TAXATION  OF  PERSONAL  INCOMES          [22 

In  New  York  in  1907  the  report  of  the  Special  Tax  Com- 
mission expressed  criticism  of  the  tax  on  four  counts :  *i 
first,  the  tax  had  always  been  a  dismal  failure;  second,  it 
involved  interstate  complications;  third,  it  would  work; 
spasmodically  and  produce  injustice  and  inquality;  and, 
fourth,  it  would  lead  to  corruption.  A  third  widely  read 
report  in  which  state  income  taxes  were  severely  criticised 
was  that  of  the  California  tax  commission  of  I9o6.2 

A  survey  of  the  objections  raised  against  the  taxation  of 
personal  incomes  by  the  states,  as  these  objections  were 
formulated  before  the  change  of  sentiment  manifested  itself 
in  1911,  shows  that  the  opposition  was  'based  largely  on 
the  ground  that  all  of  the  available  evidence  showed  that 
such  taxes  were  extremely  difficult  to  administer.  The 
theoretical  virtues  of  the  personal  income  tax  as  a  means 
of  compelling  the  individual  to  contribute  to  the  support  of 
the  state  government  under  which  he  lives  in  accordance 
with  his  ability  to  pay  were  generally  accepted  as  almost 
ideal.  The  factors  which  had  turned  and  kept  public  sen- 
timent against  the  income  tax  were  the  petty  yield,  the 
inequalities  in  administration,  the  character  of  the  local 
officials  who  had  attempted  to  collect  the  taxes,  and  the  low 
repute  in  which  personal  income  taxes  had  come  to  be  held 
in  the  states  in  which  the  experiment  had  been  made. 

The  changing  opinion  as  to  the  practicability  of  a  levy  on 
incomes  by  the  states  became  evident  before  any  state  of 
importance  fiscally  speaking,  with  the  exception  of  Wis- 
consin, had  taken  steps  in  the  direction  of  new  income 
taxes.  Professor  Seligman's  description  of  the  new  situa- 
tion, given  in  connection  with  his  early  advocacy  of  a  state 
income  tax  for  New  York,  was  expressed  as  follows  in  his' 

1  New  York  Special  Tax  Commission,  Report,  1907,  p.  46,  et  seq. 
a  Commission  on  Revenue  and  Taxation  of  the  State  of  California, 
Report,  1906. 


23]          EVOLUTION  OF  THE  STATE  INCOME  TAX  2$ 

presidential  address  at  the  Ninth  Annual  Conference  of  the 
National  Tax  Association  in  191 5-1 

Two  events  .  .  .  have  recently  occurred  to  cause  a  reappraise- 
ment  of  the  situation.  In  the  first  place,  great  progress  has  been 
made  in  the  direction  of  a  centralized  state  administration.  In 
New  York  we  now  have  under  the  law  of  1915  at  all  events  a 
distinct  step  in  the  direction  of  more  efficient  fiscal  administration. 
Of  greater  significance  is  the  fact  that  the  situation  has  been  en- 
tirely altered  by  the  introduction  of  the  federal  income  tax.  We 
have  now  gotten  people,  and  especially  business  people,  accus- 
tomed to  an  income  tax ;  and  while  there  are  still  grave  problems 
to  be  solved  and  improvements  to  be  secured,  it  may,  I  think,  be 
stated,  without  fear  of  contradiction,  that  the  income  tax  has 
come  to  stay  and  that  in  principle  it  is  not  seriously  opposed  by 
the  community.  With  the  existence  of  this  new  tax,  which  is 
successful  so  far  as  it  goes,  there  arises  the  hitherto  entirely  un- 
suspected prospect  of  a  state  income  tax  being  able  to  lean  up 
against  the  federal  tax,  so  as  to  avail  itself  of  the  federal  returns 
and  to  be  able  in  this  way  to  minimize  a  great  part  of  the  diffi- 
culties which  would  otherwise  attach  to  an  independent  state  in- 
come tax. 

A  year  later  Professor  Bullock,  whose  efforts  to  bring 
about  the  passage  of  the  income  tax  law  in  Massachusetts 
had  reached  a  successful  conclusion,  expressed  an  opinion 
that  state  income  taxes  were  to  be  increasingly  used,  but 
added  a  warning  against  too  great  a  dependence  upon 
them :  * 

If  every  citizen  were  taxable  at  his  domicile  upon  his  entire  in- 
come without  exception  or  deduction,  except  such  as  may  be 
proper  in  the  case  of  small  incomes,  and  if  then  all  tangible 
property  were  taxed,  under  a  proper  classification,  at  its  situs,  we 
should  have  the  simplest,  most  logical,  and  most  satisfactory  of 
all  solutions.  Everybody  would  pay  an  income  tax  in  the  locality 
where  he  lives  and  enjoys  the  benefits  of  government,  and  all 

1  Proceedings  of  the  National  Tax  Association,  1915,  pp.  135,  136. 

2  Proceedings  of  the  National  Tax  Association,  1916,  pp.  383,  384. 


24         STATE  TAXATION  OF  PERSONAL  INCOMES          [24 

property   would    contribute   to    the   support   of    the   jurisdiction 
where  it  receives  the  benefit  of  governmental  services.    .    .    . 

But  I  am  not  greatly  interested  today  in  ultimate  solutions. 
For  good  or  ill,  various  states  seem  inclined  to  experiment  with 
taxes  on  incomes,  and  it  is  important  to  understand  the  nature 
and  the  good  or  bad  points  of  the  income  tax.  It  should  not  be 
regarded  as  a  panacea,  it  is  not  going  to  replace  all  taxation  of 
property,  it  must  be  carefully  adjusted  to  existing  taxes  on  tan- 
gible property  and  corporations,  and  it  will  certainly  work  badly 
if  the  rate  is  excessive  or  the  administration  decentralized.  Finally, 
the  state  income  tax  should  not  be  regarded  as  the  rival,  but  rather 
as  the  complement  or  helpmate,  of  the  classified  property  tax. 

As  the  experience  of  the  states  with  personal  income 
taxes  progressed,  as  administrative  machinery  was  devel- 
oped, and  as  lessons  were  learned  and  devices  adapted  from 
the  federal  government's  use  of  the  income  tax,  the  work- 
ability of  the  state  income  taxes  ceased  to  be  a  doubtful  mat- 
ter if  administrative  conditions  were  favorable.  Many  in- 
fluences entered  into  the  situation  which  are  difficult  of 
analysis.  The  effect  upon  the  taxpayer's  point  of  view  of 
the  continually  increasing  demands  of  the  federal  income 
tax  as  applied  to  individual  incomes  was  undoubtedly  a 
factor.  This  effect,  although  difficult  to  estimate,  has 
probably  been  very  great.  The  paths  of  the  state  officials 
responsible  for  the  collection  of  state  income  taxes  have 
almost  certainly  been  smoothed  by  the  annually  recurring 
necessity  of  filling  out  the  federal  forms.  The  tendency 
towards  evasion  of  the  state  taxes  has  probably  been  mater- 
ially diminished  by  the  publicity, — informal  and  unrecog- 
nized, but  nevertheless  existent — which  has  accompanied 
the  payment  of  the  federal  tax,  especially  in  the  smalle* 
cities  and  towns.  The  effects  of  increasing  prosperity  upon 
the  willingness  of  the  individual  to  pay  an  income  tax  are 
also  exceedingly  difficult  of  measurement,  but  the  "  good 
times  "  were  certainly  not  without  effect. 


25]          EVOLUTION  OF  THE  STATE  INCOME  TAX  2$ 

The  helpful  influence  of  the  federal  tax  system  and  the 
improvements  in  the  form  and  administrative  methods  em- 
ployed by  the  states  made  possible  in  turn  further  advances 
towards  workable  tax  systems.  It  soon  became  apparent, 
as  Professor  Bullock  saw  clearly,  that  other  improvements 
must  parallel  thosj  of  state  income  taxes  if  satisfactory  re- 
venue systems  were  to  result.  Increasing  emphasis  was 
laid  upon  the  classification  of  property  taxes  and  upon  the 
usefulness  of  business  or  corporation  taxes  levied  in  a  form 
like  that  of  state  income  taxes  but  with  a  uniform  rate. 
Within  three  years  (1915  to  1917)  New  York,  Connecti- 
cut, West  Virginia,  and  Montana  had  adopted  the  latter 
plan.  Professor  Seligman,  who  with  Professor  Bullock 
was  influential  in  framing  the  personal  income  tax  law1 
passed  in  New  York  in  1919,  described  the  advantages  of 
such  a  combination  of  income  and  business  taxes  in  the 
annual  address  before  the  state  tax  conference  held  at 
Albany,  in  January, 


The  advantages  of  this  new  system  may  be  characterized  as  fol- 
lows. The  personal  income  tax  coupled  with  an  extension  of  the 
business  tax  is  a  far  better  measure  of  ability  to  pay  taxes.  .  .  . 
Second,  the  income  tax  is  in  conformity  with  modern  economic 
conditions  and  is  in  this  respect  far  preferable  to  the  general  prop- 
erty tax.  Thirdly,  the  income  tax  reaches  wealth  that  it  would  be 
impossible  to  reach  by  the  property  tax.  .  .  .  Fourthly,  the  in- 
come tax  will  bring  about  a  more  equitable  adjustment  as  between 
classes  and  the  State  itself.  An  increase  of  the  property  tax 
which,  as  we  know,  necessarily  implies  a  real  estate  tax,  means  an 
increase  in  the  tax  of  the  farmer  ;  the  adoption  of  the  income  tax 
will  mean,  as  it  ought  to  mean,  primarily  the  taxation  of  the 
cities,  where,  as  we  have  seen,  most  of  the  incomes  are  earned  and 
received.  .  .  . 

It  is  clear,  therefore,  that  from  every  point  of  view,  that  of  ade- 

1  Eighth  (New  York)  State  Conference  on  Taxation,  Proceedings, 
1919,  PP.  21,  22. 


26         STATE  TAXATION  OF  PERSONAL  INCOMES          [26 

quacy,  that  of  efficiency,  and  that  of  equity,  all  indications  point 
unerringly  to  the  desirability  of  the  combination  of  an  income  tax 
and  a  business  tax  as  a  way  out  of  our  fiscal  difficulties,  both 
State  and  local. 

5.     The  development  of  model  income  tax  laws 

The  growing  popularity  of  state  income?  tax  laws  and  the 
inevitability  of  interstate  complications  and  confusion  on 
account  of  those  laws  was  one  of  the  influences  behind  the 
appointment  of  a  committee  by  the  National  Tax  Associa- 
tion in  1916  to  consider  the  report  upon  a  model  tax  system. 
This  committee  was  carefully  chosen,  and  consisted  of  men 
whose  interest  in  improved  legislation  and  administration 
was  already  demonstrated.  Professor  Bullock  of  Harvard 
was  made  chairman.  The  entrance  of  the  United  State^ 
into  the  world  war  seriously  interfered  with  the  work  of 
the  committee  during  the  first  two  years  of  its  life:  Pro- 
fessor T.  S.  Adams  of  Yale,  one  of  the  members,  entered 
the  employ  of  the  United  States  Treasury  Departmtnt  as  a 
revenue  expert;  Mr.  Ogden  Mills  of  New  York  City  was 
sent  at  once  to  France;  and  the  other  members  undertook 
such  heavy  additional  duties  during  the  war  that  the  work 
of  the  committee  was  forced  almost  to  a  standstill.  Finally, 
in  September,  1918,  a  preliminary  report  was  published,1 
(Appendix  I),  with  the  signatures  of  all  members  of  the 
committee  except  Professor  Adams,  whose  work  at  Wash- 
ington had  excluded  him  from  collaboration  in  the  report, 
but  who  described  it  as  "  one  of  the  wisest  and  most  help- 
ful statements  ever  published  concerning  the  proper  struc- 
ture of  the  tax  system  in  an  American  state."  The  re- 

1  Preliminary  Report  of  the  Committee  Appointed  by  the  National 
Tax  Association  to  Prepare  a  Plan  of  a  Model  System  of  State  and 
Local  Taxation,  Sept.,  1918. 

*  Preliminary  Report,  p.  45. 


27]  EVOLUTION  OF  THE  STATE  INCOME  TAX  2/ 

port  met  with  "  almost  absolute  approval "  from  the  dele- 
gates present  at  the  annual  conference  of  the  National  Tax 
Association  in  June,  1919,  and  it  may  therefore  confidently 
be  said  that  the  endorsement  of  the  principle  of  state  in- 
come taxes  which  it  contains  is  subscribed  to  by  many  of 
the  best-known  tax  administrators  and  tax  critics  in  the 
United  States, 

The  committee  reached  the  conclusion  that  a  diversified 
system  of  taxation  was  the  only  one  which  could  be  adapted 
to  present  conditions.  It  was  recognized  that  the  proposed 
system  must  yield  large  revenues,  be  practicable  from  an 
administrative  standpoint,  be  adapted  to  a  federal  form  of 
government,  respect  existing  constitutional  limitations,  re- 
present as  nearly  as  possible  a  consensus  of  opinion,  and 
exclude  measures  wholly  foreign  to  American  ideas  and 
experience.  The  committee  proposed  three  types  of  taxes : 
a  personal  income  tax,  levied  consistently  upon  the  principle 
of  taxing  every  one  at  his  place  of  domicile;  a  property 
tax  upon  tangible  property,  levied  objectively  where  such 
property  has  its  situs;  and  a  business  tax  upon  all  business 
carried  on  within  the  jurisdiction  of  the  authority  levying 
such  tax.  The  committee  believed  that  in  using  a  combina- 
tion of  these  three  taxes  the  states  would  'be  applying 
logically  and  consistently  the  principles  which  already  un- 
derlay the  greater  part  of  their  tax  laws. 

The  recommendation  of  a  personal  income  tax  by  this 
committee,  as  a  part  of  the  three-fold  tax  system  suggested 
above,  was  the  result  of  a  choice  among  four  possible  forms 
of  personal  taxation.  The  committee  rejected  the  poll  tax 
as  inadequate  and  unequal  in  its  operation;  a  net  property 
tax,  as  foreign  to  the  revenue  traditions  of  the  United 
States;  and  a  presumptive  income  tax,  such  as  a  tax  on 
rentals,  as  an  imperfect  indication  of  the  individual's  ability 
to  contribute  to  the  support  of  the  government  under  which 


2g         STATE  TAXATION  OF  PERSONAL  INCOMES          [2g 

he  lives.  The  committee  considered  that  the  fourth  pos- 
sible tax,  the  personal  income  tax,  could  be  well  admin- 
istered, (as  the  experience  of  Wisconsin  and  Massachusetts 
had  already  proved  at  the  time  when  the  preliminary  re- 
port was  made)  and  offered  the  line  of  least  resistance. 
The  committee's  conclusion  on  this  point  was  tersely  stated 
as  follows : x 

The  committee  ...  is  of  the  opinion  that  a  personal  income  tax 
is  the  best  method  of  enforcing  the  personal  obligation  of  the 
citizen  for  the  support  of  the  government  under  which  he  lives, 
and  recommends  it  as  a  constituent  part  of  a  model  system  of 
state  and  local  taxation. 

With  the  caution  that  the  details  of  each  tax  should  be 
adjusted  in  such  a  way  as  to  enable  it  to  effect  the  prin- 
ciple on  which  it  is  based,  the  committee  suggested  "  the 
broad  outlines  "  of  the  manner  in  which  the  personal  in- 
come tax  should  be  levied,  as  follows : 

First,  since  the  personal  income  tax  is  to  enforce  the  ob- 
ligation of  every  citizen  to  the  government  under  which 
he  is  domiciled,  the  tax  must  be  levied  only  upon  persons 
and  in  the  states  where  they  are  domiciled.  It  should  not 
apply  to  business  concerns.  If  the  personal  income  tax  is 
not  limited  in  this  way,  it  will  not  form  the  supplement  to 
the  other  taxes  advocated,  but  will  perpetuate  the  old  evil 
of  double  taxation. 

Second,  the  personal  income  tax  should  be  levied  in  re- 
spect of  the  citizen's  entire  income  from  all  sources.  The 
only  necessary  qualification  is  that  which  is  necessitated  by 
the  constitutional  limitations  upon  taxation  of  federal  bonds 
and  the  salaries  of  federal  officials  by  the  states.  The 
personal  obligation  of  the  citizen  to  contribute  to  the  sup- 
port of  the  government  under  which  he  lives  should  not 
be  affected  by  the  form  his  investments  take. 

1  Preliminary  Report,  p.  12. 


29]          EVOLUTION  OF  THE  STATE  INCOME  TAX  2g 

Third,  The  personal  income  tax  should  be  levied  upon 
net  income  defined  substantially  as  an  accountant  would  de- 
termine it.  This  implies  the  deduction  of  operating  ex- 
penses and  interest  on  indebtedness.  The  large  amount  of 
federal  bonds  exempt  from  local  taxation  introduces  a  com- 
plication. The  interest  deduction  should  therefore  be 
limited  to  an  amount  proportional  to  the  income  which  the 
taxpayer  derives  from  taxable  sources. 

Fourth,  the  amount  of  income  exempted  from  the  per- 
sonal  income  tax  should  not  exceed  $600  for  a  single  person 
and  $1,200  for  husband  and  wife,  with  $200  in  addition 
for  each  dependent  up  to  a  number  not  to  exceed  three. 
This  would  make  the  maximum  possible  exemption  $1,800. 
This  recommendation  is  made  with  the  modifying  admission 
that  conditions  differ  in  the  various  states,  and  for  that 
reason  it  is  limited  to  the  statement  of  the  maximum  exemp- 
tions desirable  and  the  observation  that  under  a  democratic 
form  of  government  as  few  people  as  possible  should  be 
exempt  from  the  necessity  of  making  a  direct  personal  con- 
tribution towards  the  support  of  the  state. 

Fifth,  the  rate  of  the  income  tax  should  not  be  differ  en- 
tiated  according  to  the  sources  from  which  income  is  de- 
rived. The  personal  income  tax  is  designed  to  be  part  of  a 
system  in  which  there  is  a  tax  upon  tangible  property. 
Under  such  a  system  there  will  be  heavier  taxation  of  the 
sources  from  which  funded  income  is  derived,  and  there 
will  be  little,  if  any  ground  for  attempting  to  differentiate 
the  rates  of  the  personal  income  tax.  Furthermore,  such 
differentiation  greatly  complicates  the  administration  of 
the  tax. 

Sixth,  the  rates  of  taxation  should  be  progressive,  with 
the  lowest  rate  not  less  than  one  per  cent  and  the  highest 
rate  probably  not  greater  than  six  per  cent.  The  classes  of 
taxable  income  to  which  the  various  rates  apply  should  pro- 


30         STATE  TAXATION  OF  PERSONAL  INCOMES          [30 

bably  include  $1,000  each.  In  such  a  plan,  the  tax  for  a 
single  person  would  start  at  one  per  cent  on  any  amount  of 
income  from  $600  to  $1,600  and  reach  six  per  cent  on  all 
income  in  excess  of  $5,600.  This  recommendation  is  made 
only  in  a  general  way,  to  illustrate  the  underlying  recom- 
mendation that  the  rates  of  the  personal  income  tax  should 
be  moderate,  and  should  be,  as  nearly  as  practicable,  uni- 
form throughout  the  United  States. 

Seventh,  the  administration  of  the  personal  income  ta.v 
should  be  placed  in  the  hands  of  state  officials.  This  type  of 
administration  is  regarded  by  the  committee  as  an  indis- 
pensable condition  for  the  successful  operation  of  any  state 
income  tax.  Experience  has  proved  that  local  administra- 
tion of  the  tax  cannot  work  well.  The  state  tax  com- 
mission or  commissioner  is  the  proper  agent  to  adminster 
the  tax. 

Eighth,  the  personal  income  tax  should  be  collected  from 
taxpayers,  on  the  basis  of  returns,  without  attempts  ta 
collect  at  the  source.  Experience  has  shown  that  this  can 
be  done  satisfactorily.  Collection  at  the  source  presents 
serious  administrative  difficulties,  imposes  undeserved  bur- 
dens on  third  parties,  and  sometimes  tends  to  shift  the  taxi 
burden.  Collection  at  the  source  is  inconsistent  with  the 
purpose  of  bringing  home  to  the  taxpayer  his  personal  obli- 
gation to  the  government  under  which  he  lives.  Informa- 
tion at  the  source  may,  however,  prove  helpful. 

Ninth,  the  proceeds  of  the  tax  should  probably  be  divided 
between  the  state  and  local  governments  in  most  cases. 
The  plan  of  distribution  is  immaterial  in  the  general  plan 
of  taxation  which  the  committee  advises.  Moreover,  the 
same  solution  is  probably  not  advisable  in  every  state.  If 
the  revenue  is  divided,  the  suggestion  is  made  that  the 
state  governments  might  retain  a  proportion  corresponding1 
to  the  proportion  which  state  expenditures  bear  to  the  total 


3i]          EVOLUTION  OF  THE  STATE  INCOME  TAX  3I 

of  the  state  and  local  expenditures,  and  that  the  same  prin- 
ciple should  apply  in  determining  the  share  received  by  each 
of  the  subordinate  political  units.  The  entire  question  of 
distribution  must  necessarily  be  largely  affected  by  local 
conditions,  and  the  committee  found  it  impossible  to  make 
other  than  general  suggestions. 

The  business  tax  recommended  by  the  committee  was 
simply  a  moderate  tax  at  a  proportional  rate  (such  as  two 
per  cent)  upon  the  net  income  derived  from  business  done 
in  a  particular  locality. 

The  committee  held  that  the  combination  of  taxes  re- 
commended would  give  better  results  than  any  one  tax. 
Inequalities  which  arise  under  the  three  separate  taxes 
would  not  be  concentrated  at  the  same  point,  and  there 
would  almost  certainly  be  a  somewhat  compensatory  ef- 
fect. The  taxation  of  intangible  property  as  property  will 
be  eliminated. 

With  regard  to  the  amendment  of  state  constitutions 
necessary  for  the  introduction  of  these  systems  of  taxation, 
the  committee  stated  that  "  no  more,  and  probably  no  less 
amendment  of  state  constitutions  "  would  'be  required  than 
in  the  case  of  any  other  plan  adequate  to  the  needs  of  the 
case. 

After  the  publication  of  the  preliminary  report  of  the 
committee  on  model  taxation  attention  centered  largely  on 
the  committee's  conclusions  concerning  the  personal  in- 
come tax.  Little  adverse  criticism  was  heard,  but  the  im- 
mediate incorporation  of  such  recommendations  into  law 
progressed  slowly.  In  the  New  York  personal  income  tax 
law  of  1919  may  be  seen  the  expression  of  similar  ideas 
concerning  equitable  rates  and  proper  administrative  pro- 
cedure. To  a  lesser  extent  the  laws  passed  in  the  same 
year  in  North  Dakota  and  New  Mexico  show  that  the  re- 
commendations of  the  committee  on  model  taxation  have 


32         STATE  TAXATION  OF  PERSONAL  INCOMES          [32 

been  effective.  In  September,  1920,  at  the  annual  con- 
ference of  the  National  Tax  Association  at  Salt  Lake  City, 
it  developed  that  actual  drafts  of  "  model  "  personal  income 
tax  and  business  income  tax  laws  would  be  useful  to  state 
officials  who  desired  to  have  such  laws  considered  by  the 
legislatures  of  1921.  The  committee  consented  to  under- 
take the  work,  obtained  the  assistance  as  counsel  of  Mr. 
Henry  H.  Bond,  of  the  Boston  bar,  who  was  in  charge 
of  the  administration  of  the  Massachusetts  income  tax  for 
the  first  two  years  of  its  existence,  and  of  Mr.  George  E. 
Holmes,  of  the  New  York  bar,  author  of  a  treatise  on 
federal  taxation,  and  published  the  drafts  of  the  two  laws 
early  in  1921.  These  drafts  were  prepared  with  great  care, 
and  an  attempt  was  made  to  word  the  text  and  to  number 
the  various  articles  and  sections  so  that  the  corresponding 
laws  might  be  adopted  by  any  state  and  subsequently  en- 
larged or  modified  with  a  minimum  of  change. 

The  draft  of  a  personal  income  tax  law  (Appendix  II) 
contains  few  changes  from  the  plan  suggested  in  the  com- 
mittee's preliminary  report,  although  the  details  are  neces- 
sarily presented  much  more  fully.  The  exemptions  sug- 
gested in  the  draft  of  the  law  are  higher,  and  conform  to 
those  permitted  under  the  federal  income  tax  law.  The 
final  draft  includes  no  suggestions  for  the  distribution  of 
the  proceeds  of  the  tax,  other  than  the  suggestion  that  the 
localities  should  be  notified  of  their  share  in  time  to  take 
the  sum  into  account  in  determining  the  local  tax  for  the 
year,  and  the  suggestion  that  a  reasonable  amount  should  be 
withheld  for  refunds.  In  presenting  the  draft,  the  chair- 
man of  the  committee  called  attention  to  the  fact  that  in  such 
matters  of  administration  it  was  impossible  to  bring  the 
necessary  provisions  for  the  various  states  into  the  form  of 
one  suggested  law.  The  draft  of  the  model  income  taxi 
law  is  in  other  respects  full,  detailed,  and  based  on  the  best 


33]          EVOLUTION  OF  THE  STATE  INCOME  TAX  33 

modern  income  tax  practice.  The  opportunity  for  flexi- 
bility in  administrative  matters  which  it  offers  makes  its 
adoption  in  substantially  its  present  form  a  practical  pos- 
sibility for  almost  every  state. 

The  wave  of  popularity  upon  which  the  income  tax  has 
ridden  during  the  past  decade  may  subside  to  some  extent, 
as  it  has  subsided  in  the  case  of  certain  other  features  with 
which  the  American  states  have  attempted  to  improve  their 
revenue  systems.  Professor  Lutz,  who  has  been  active  in 
working  for  the  adoption  of  an  income  tax  in  Ohio,  gives 
the  following  warning : x 

A  few  years  ago  separation  of  the  sources  of  revenue  was  our 
revenue  panacea.  Today  there  is  some  danger  of  placing  too 
great  reliance  upon  the  income  tax  as  the  chief  agent  of  our  fiscal 
salvation.  Such  expectations  are  doomed,  and  this  failure  will 
react  unfavorably  against  the  income  tax  in  its  proper  place.  It 
is  more  true  today  than  ever  that  no  one  system  will  prove  a 
cure-all.  We  must  diversify  our  revenue  system,  combine  prop- 
erty and  income  taxation,  and  strive  toward  a  genuine  and  effec- 
tive coordination  of  the  widely  diverse  and  different  sources  of 
revenue. 

If  such  recommendations  as  these  are  followed,  and  if 
the  personal  income  tax  is  fitted  into  its  proper  place  in  a 
diversified  revenue  system  in  the  states  in  which  it  is  ad- 
opted, we  may  expect  only  temporary  reactions,  and  in  the 
long  run  a  permanent  and  stable  place  for  the  income  tax 
in  the  state  revenue  systems. 

1  H.  L.  Lutz,  Report  an  the  Operation  of  State  Income  Taxes,  in  the 
Report  of  the  (Ohio)  Special  Joint  Taxation  Committee,  1919,  p.  125. 


CHAPTER  II 
THE  WISCONSIN  INCOME  TAX 

i.  History  of  the  legislation 

THE  new  phase  in  the  taxation  of  incomes  which  opened 
with  the  adoption  of  an  income  tax  in  Wisconsin  in  1911 
was  one  of  the  results  of  years  of  effort  for  the  reform  of 
taxation  in  that  state.  Wisconsin's  progressive  attitude  to- 
wards tax  matters  had  become  evident  when  the  state  tax' 
commission  was  created  in  1899.  From  that  time  forward 
the  state  had  the  advantage  of  the  experience  and  advice 
of  an  able  administrative  organization  with  specialized  func- 
tions, as  a  consequence  of  which  several  far-reaching  im- 
provements were  brought  about. 

Agitation  for  an  income  tax  had  preceded  the  appoint- 
ment of  the  commission  by  several  years.1  A  progressive 
income  tax  plan  had  appeared  in  the  platform  of  thd 
People's  Party  in  the  early  nineties,  but  no  legislation  had 
resulted.2  The  movement  which  culminated  in  the  passage 
of  an  income  tax  law  in  1911  first  manifested  itself  in  1903, 
as  a  result  of  a  discussion  of  the  taxation  of  intangibles. 
In  that  year  two  members  of  the  state  tax  commission  re- 

1  The  writer  is  indebted  to  Mr.  Nils  P.  Haugen,  who  became  a  mem- 
ber of  the  Wisconsin  Tax  Commission  in  1901  and)  who  was  its  chair- 
man from  1911  to  1921,  for  valuable  information  on  the  history  of  the 
income  tax  movement  in  Wisconsin1. 

2  T.  ;S.  Adams,  "  The  Wisconsin  Income  Tax,"  American  Economic 
Review,  vol.  i,  no.  4  (Dec.,  1911),  p.  906. 

34  [34 


35  ]  THE  WISCONSIN  INCOME  TAX  35 

commended  the  exemption  of  credits  from  taxation.  The 
third  member  of  the  commission,  Mr.  Nils  P.  Haugen,  op- 
posed the  flat  exemption  of  credits  without  some  substitute. 
In  the  discussion  of  possible  alternatives  Mr.  Haugen  sug- 
gested an  income  tax.  At  that  time  the  Wisconsin  constitu- 
tion did  not  provide  directly  for  an  income  tax  and  it  was 
doubtful  whether  such  a  measure  would  be  upheld ;  but  the 
suggestion  had  been  brought  into  the  public  attention  as  a 
live  issue,  and  Mr.  Haugen  was  requested  by  the  assembly 
committee  on  the  assessment  and  collection  of  taxes  to  draft 
a  constitutional  amendment  permitting  the  imposition  of  a 
graduated  income  tax.  With  the  assistance  of  Mr.  Dahl, 
chairman  of  the  committee  on  taxation,  a  draft  was  im- 
mediately made,  and  the  legislature  passed  the  amendment 
in  the  same  year  (1903).  Through  an  error  in  advertising; 
the  amendment  the  next  step  was  postponed  for  two  years. 
The  amendment  was  again  approved  by  the  legislatures  of 
1905  and  1907.  It  was  voted  upon  by  the  people  in  the 
elections  of  November,  1908,  and  carried  by  an  overwhelm- 
ing majority.  Two  bills  were  introduced  in  the  legislature 
of  1909, — one  in  the  senate  by  Senator  Paul  Husting,  later 
United  States  Senator,  and  the  other  in  the  assembly  by 
Mr.  Ingram.  Both  bills  represented  Mr.  Haugen' s  income 
tax  recommendations.  Meanwhile  a  campaign  of  popular 
education  had  been  proceeding;  the  subject  was  given  wide 
publicity,  and  Mr.  Haugen  himself  was  a  frequent  contri- 
butor to  the  Milwaukee  Free  Press,  writing  in  support  ofi 
the  proposed  tax. 

After  a  discussion  of  the  two  bills  proposed  in  the  legis- 
lature of  1909,  the  bills  were  referred  to  a  special  legislative 
committee  which  was  instructed  to  report  to  the  legislature 
of  1911.  The  committee  presented  a  bill  to  the  legislature 
of  1911,  and  after  another  prolonged  discussion  and  the  in- 
troduction of  several  amendments  the  bill  became  law  in  the 


36         STATE  TAXATION  OF  PERSONAL  INCOMES          [36 

summer  of  I9H,1 — eight  years  after  the  proposal  was  first 
made  by  Mr.  Haugen. 

In  drafting  the  income  tax  law  all  of  the  available  infor- 
mation concerning  state  income  taxes  and  the  income  taxes 
of  foreign  countries  was  reviewed  in  great  detail,  and  the 
Wisconsin  law  was  painstakingly  framed  along  the  lines* 
which  history  had  shown  to  be  most  workable.  Two  Wis^ 
consin  men,  Professor  D.  O.  Kinsman  and  Mr.  K.  K.  Ken- 
nan,  had  published  historical  studies  of  income  taxes  which 
were  extensively  used  in  the  preparation  of  the  Wisconsin 
bills.2  Professor  Kinsman  regarded  state  income  taxes  as 
almost  complete  failures,  but  his  account  of  low  rates  and 
local  administration  as  possible  causes  of  the  failure  was 
illuminating.  The  Prussian  income  tax  was  in  operation 
at  this  time,  and  Norway  was  working  on  a  proposal  which 
was  subsequently  enacted  into  law.  Although  few  of  the 
particular  provisions  which  were  found  in  these  measures1 
were  applicable  to  the  situation  in  Wisconsin,  the  careful 
analysis  of  the  various  explanations  of  successes  and  fail- 
ures which  was  made  by  the  proponents  of  the  Wisconsin 
tax  must  be  held  in  part  responsible  for  the  seaworthiness, 
of  the  Wisconsin  law  which  was  finally  passed  in  1911. 

Professor  T.  S.  Adams,  one  of  the  early  supporters  of 
the  income  tax  in  Wisconsin,  notes  as  significant  the  fact 
that  the  ratification  of  the  constitutional  amendment  was 
urged  by  all  political  parties  and  that  in  1910  the  passage 
of  an  income  tax  law  called  for  in  the  various  party  plat- 
forms.3 Professor  Adams  holds  that  this  agreement  on 
the  income  tax  represented  the  fusion  of  two  groups :  those 

1  Laws  of  Wisconsin,  1911,  ch.  658  (June  29,  1911). 

aD.  O.  Kinsman,  The  Income  Tax  in  the  Commonwealths  of  the 
United  States  (New  York,  1903)  ;  and  K.  K.  Kennan,  Income  Taxation 
(Milwaukee,  1910). 

'Adams,  op.  cit.,  pp.  906,  907. 


37]  THE  WISCONSIN  INCOME  TAX  37 

who  believed  income  taxation  to  be  a  means  of  social  re- 
form, and  those  who  regarded  the  tax  merely  as  a  practical1 
substitute  for  personal  property  taxation. 

By  the  time  the  income  tax  law  was  finally  passed  the 
situation  with  regard  to  the  taxation  of  personal  property 
had  become  serious.  Governor  McGovern,  during  whose 
administration  the  tax  was  put  into  operation,  and  to  whom 
is  due  much  of  the  credit  for  the  success  of  the  income  tax! 
in  its  critical  first  year,  describes  the  old  system  of  personal 
property  taxation  as  follows : 1 

The  reason  an  income  tax  was  demanded  by  the  people  of  Wis- 
consin was  that  the  old  system  of  personal  property  taxation  had 
broken  down.  .  .  .  Irregularities  in  the  assessment  of  property 
inevitably  destroyed  uniformity  of  taxation,  but  they  did  more. 
They  introduced  a  vicious  system  of  class  legislation.  A  careful 
investigation  of  the  assessments  of  2,239  persons  shows  that  if  the 
assessment  of  the  property  of  farmers  be  placed  at  100  per  cent, 
that  of  merchants  would  be  only  64  per  cent  and  that  of  manu- 
facturers but  36  per  cent.  .  .  .  Worse  still,  the  poor  were  system- 
atically discriminated  against  in  favor  of  the  rich.  The  plain  fact 
is  that  under  this  system  the  poorer  a  man  was  the  higher  pro- 
portionately he  was  assessed,  and  the  richer  he  was  the  lower  he 
was  assessed. 

The  income  tax  law  passed  in  1911  was  unlike  many  of 
the  state  income  tax  laws  which  had  been  tried  in  this 
country  in  that  it  provided  for  the  taxation  of  business  as 
well  as  of  personal  incomes.  The  incomes  of  corporations 
and  of  individuals  (resident  and  non-resident)  arising  from 
sources  within  the  state  of  Wisconsin  were  subject  to  taxa- 
tion. The  law  provided  that  the  term  "  income  "  should  in- 
clude rent,  interest,  wages,  profits,  royalties,  and  "  all  other 
gains,  profits  or  income  of  any  kind  derived  from  any 
source  whatever"  (except  those  specifically  exempted). 

1 F.  E.  McGovern,  "  A  State  Income  Tax,"  Proceedings  of  the  Gov- 
ernors' Conference,  1912,  pp.  80,  82. 


38         STATE  TAXATION  OF  PERSONAL  INCOMES          [38 

Residents  of  the  state  were  entitled  to  exemptions  of  $800 
to  the  individual,  $1,200  to  husband  and  wife  together,  and 
$200  for  each  child  and  for  each  other  dependent.  Various 
kinds  of  income  not  properly  subject  to  taxation  in  this! 
way,  such  as  pensions  from  the  United  States  and  divi- 
dends from  corporations  which  paid  the  income  tax,  were 
also  exempted.  Deductions  were  allowed  for  the  ordinary 
expenses  of  doing  business  and  for  similar  items.  The  law 
included  a  provision  that  in  the  payment  of  income  taxes  it 
should  be  allowable  to  present  personal  property  tax  re- 
ceipts. This  provision,  known  as  the  "  personal  property 
tax  offset  "  was  to  become  a  serious  problem  in  later  years. 

Progressive  rates  were  applied  to  both  individual  and 
corporate  incomes.  The  tax  on  individual  incomes,  which 
reached  a  maximum  at  six  per  cent  on  amounts  in  excess 
of  $12,000,  was  less  steeply  graduated.  The  following 
table,  adapted  from  that  published  by  the  State  Tax  Com- 
mission as  an  aid  to  computation,  shows  the  scheduled  rates 
and  true  rates  of  the  tax.1 

True  rate  (per  cent) 
on  whole  amount 

I  JO 

1.125 

1.25 

1.375 

1-5 

1.6667 

1.8571 

2.0625 

2.2778 

2-5 

2.7273 

2.9582 

3.1923 
3.5667 
4.175 

1  Wisconsin  Tax    Commission,    The    Wisconsin   Income    Tax   Law 
(1919),  p.  26. 


Taxable  Income 

Rate 

of  Individuals 

(per  cent)     Tax 

Total  ta 

ISt 

$1,000  

i 

$10.00 

$10.00 

2nd 

1,000  

i/4 

12.50 

22.50 

3rd 

1,000  

i*A 

15.00 

37-50 

4th 

1,000  

\Ya, 

17.50 

55.00 

5th 

1,000  

2 

20.00 

75-00 

6th 

1,000  

2^2* 

25.00 

100.00 

7th 

1,000  

3 

30.00 

130.00 

8th 

1,000  

Zl/2 

35.00 

165.00 

9th 

1,000  

4 

40.00 

205.00 

loth 

1,000  

4^2 

45.00 

250.00 

nth 

1,000  

5 

50.00 

300.00 

I2th 

1,000  

5/^2 

55.oo 

355.00 

I3th 

1,000  

6 

60.00 

4i5.oo 

1  5th 

1,000  

6 

60.00 

535.00 

20th 

1,000  

6 

60.00 

835.00 

39]  THE  WISCONSIN  INCOME  TAX  39 

The  rates  for  the  income  of  corporations,  as  originally 
adopted,  were  determined  by  the  relation  between  the  tax- 
able income  and  the  assessed  value  of  the  property  used  in 
the  acquisition  of  the  income.  The  scale  was  graduated, 
rising  from  one  half  of  one  per  cent  where  the  per  cent  of 
taxable  income  to  value  of  property  was  one  per  cent  or  less, 
to  six  per  cent  where  the  per  cent  of  taxable  income  to  value 
of  property  was  from  n  to  12  per  cent. 

This  method  proved  to  be  unnecessarily  unwieldy,  and 
after  two  years  the  scheme  was  changed  to  correspond  with 
that  used  for  the  calculation  of  taxes  on  individual  in- 
comes.1 The  initial  rate  was  fixed  at  two  per  cent,  and  the 
maximum  of  six  per  cent  was  reached  at  a  point  just  above 
$6,000. 

Probably  the  most  distinctive  feature  of  the  Wisconsin 
law  was  the  centralized  administration  for  which  it  pro- 
vided. The  state  tax  commission  was  required  to  assess  the 
incomes  of  corporations  and  to  provide  the  necessary  rules 
for  the  assessment  of  the  incomes  of  individuals  and  part- 
nerships; to  divide  the  state  into  assessment  districts,  and 
to  appoint  officials  under  the  civil  service  rules  to  make  the 
assessments  within  the  respective  districts.  A  state  "  sup- 
ervisor of  the  income  tax  "  was  appointed  to  work  out  the 
details  of  the  new  system. 

The  collections  were  made  through  the  local  collectors  of 
property  taxes.  The  income  taxes  were  certified  to  these 
collectors,  and  were  entered  for  collection  at  the  same  time 
and  in  the  same  manner  as  other  taxes,  but  on  a  separate 
roll.  In  this  way  the  persons  who  might  find  the  remission 
of  the  amount  of  their  taxes  to  the  state  treasurer  an  un- 
familiar and  difficult  process  were  enabled  to  pay  the  re- 
quired amounts  to  the  local  collector  through  a  simple  trans- 
fer of  cash. 

1  Laws  of  Wisconsin,  1913,  ch.  720. 


40         STATE  TAXATION  OF  PERSONAL  INCOMES          [40 

Several  new  problems  of  taxation  were  produced  by  the 
Wisconsin  law.  One  of  the  most  puzzling  was  that  of  the 
allocation  of  income  derived  from  within  and  without  the 
state.  Income  from  rentals,  royalties,  and  gains  or  profits 
from  the  operation  of  any  farm,  mine,  or  quarry  was  not 
apportionable  for  the  reason  that  it  followed  the  sitits  of 
the  property  from  which  it  was  derived.  Income  from  per- 
sonal services,  land  contracts,  mortgages,  stocks,  bonds,  and 
securities  was  not  apportionable  for  the  reason  that  it  was 
considered  to  have  its  situs  at  the  residence  of  the  recipient. 
Business  incomes  of  individuals  derived  from  sources  with- 
in and  without  the  state  were  subject  to  tax  only  upon  that 
portion  received  from  sources  within  the  state.  In  deter- 
mining this  amount  the  rule  of  apportionment  for  indivi- 
duals followed  that  for  corporations,  which  stood  as  fol- 
lows after  1913 : x 

In  determining  the  proportion  of  capital  stock  employed  in  the 
state,  the  same  shall  be  computed  by  taking  the  gross  business  in 
dollars  of  the  corporation  in  the  state  and  add  [ing]  the  same  to 
the  full  value  in  dollars  of  the  property  of  the  corporation  located 
in  the  state.  The  sum  so  obtained  shall  be  the  numerator  of  a 
fraction  of  which  the  denominator  shall  consist  of  the  total  gross 
business  in  dollars  of  the  corporation,  both  within  and  without 
the  state,  added  to  the  full  value  in  dollars  of  the  entire  property 
of  the  corporation,  both  within  and  without  the  state.  The  frac- 
tion so  obtained  shall  represent  the  proportion  of  capital  stock 
represented  within  the  state. 

Having  obtained  this  figure  (for  example,  .6),  the  cor- 
responding part  of  the  net  income  was  taxable  in  Wisconsin. 

A  system  of  "information  at  the  source  "  was  developed 
into  a  smoothly  working  part  of  the  machinery  early  in 
the  history  of  the  Wisconsin  income  tax.  This  system  is 

1  Laws  of  Wisconsin,  1913,  ch.  720  [section  I7;ob,  subsection  7,  sub- 
division (e)]. 


4I]  THE  WISCONSIN  INCOME  TAX  4! 

only  partially  provided  for  in  the  income  tax  law  itself, 
but  it  has  been  worked  out  by  the  tax  commission  under  the 
authority  which  it  holds  for  making  necessary  regulations. 
The  law  provides  that  in  order  to  deduct  wages  paid  to  em- 
ployees from  gross  income,  corporations  must  report  "  the 
name,  address  and  amount  paid  each  such  employee  or 
officer  residing  within  this  state  to  whom  a  compensation  of 
seven  hundred  dollars  or  more  shall  have  been  paid  during 
the  assessment  year."  In  the  same  way  the  names  and  ad- 
dresses of  persons  to  whom  interest  on  indebtedness  is  paid 
must  be  reported  or  the  deduction  of  such  interest  will  not 
•be  permitted  to  the  taxpayer.2  As  the  plans  have  been 
worked  out,  the  forms  distributed  for  the  income  tax  re- 
turns are  accompanied  by  blanks  upon  which  salaries  or 
wages  to  the  amount  of  $700  or  more  are  to  be  entered,  and 
by  other  blanks  for  lists  of  stockholders  of  corporations  and 
the  dividends  paid  them.  In  the  same  way  reports  are  made 
concerning  interest  payments.  This  system  operates  as  a 
check  upon  the  payment  of  excessive  salaries  by  corpora- 
tions, as  a  means  of  checking  up  corporate  deductions  for 
wages,  salaries,  and  dividends,  and  as  a  check  upon  the  re- 
turns made  by  individuals  who  receive  wages,  salaries,  divi- 
dends, or  interest.  This  method  was  at  first  regarded  as 
highly  inquisitorial,  but  with  the  passage  of  time  the  return 
of  such  information  has  come  to  be  regarded  as  a  matter 
of  course  and  as  one  of  the  troublesome  but  necessary 
details  in  the  efficient  administration  of  an  income  tax. 

The  distribution  of  the  proceeds  of  the  income  tax  has 
proved  to  be  one  of  the  most  vexing  problems  which  the 
levy  of  income  taxes  by  the  states  has  produced.  Up  to  the 
time  of  the  passage  of  the  Wisconsin  law  the  matter  had 
had  little  discussion,  and  the  funds  had  gone  into  the  various! 

1  Laws  of  Wisconsin,  1913,  ch.  720. 
8  Laws  of  Wisconsin,  1917,  ch.  231. 


42         STATE  TAXATION  OF  PERSONAL  INCOMES          [42 

state  treasuries  as  a  matter  of  course.  Wisconsin,  however, 
adopted  a  novel  plan  of  distribution  to  the  localities.  It 
was  hoped  that  the  income  tax  would  eventually  supplant 
the  more  undesirable  forms  of  personalty  taxation,  and  in 
that  case  some  recompense  must  be  made  to  the  local  tax- 
ing units.  The  Wisconsin  law  accordingly  provided  that 
70  per  cent  of  the  receipts  from  the  income  tax  should  go  to 
the  city,  town,  or  village  from  which  those  receipts  were 
derived;  20  per  cent  to  the  county,  and  the  remaining  10 
per  cent  to  the  state.  It  was  assumed  that  the  sum  retained 
by  the  state  would  approximately  cover  the  cost  of  collec- 
tion. In  practice,  the  state's  share  of  the  receipts  have  far 
exceeded  the  cost. 

The  two  assumptions  underlying  this  plan, — that  of  a 
large  revenue  from  the  tax  and  the  belief  that  the  tax  would 
prove  an  effective  substitute  for  the  personal  property  tax — > 
were  subsequently  justified.  The  distribution  to  the  locali- 
ties proved  to  be  a  workable  arrangement  and  one  which 
other  and  richer  states  were  later  to  experiment  with. 

Further  evidence  that  the  Wisconsin  income  tax  was  in- 
tended as  a  substitute  for  the  tax  on  personal  property 
rather  than  as  an  addition  to  the  general  property  tax  is 
found  in  the  fact  that  the  original  bill  provided  for  the  en- 
tire exemption  of  personal  property.  The  legislators  feared 
that  the  proceeds  of  the  income  tax  would  not  compensate 
for  the  losses  which  would  result,  and  it  was  decided  that 
the  taxation  of  tangible  personal  property  should  be  con- 
tinued, but  that  the  taxes  paid  should  be  allowed  as  "  offsets  " 
against  the  income  tax,  in  the  manner  described  above.  In- 
tangibles were  exempted,  however,  together  with  certain 
classes  of  property  which  had  proved  to  be  particularly 
difficult  of  assessment,  such  as  household  goods  and  fur- 
nishings, farm  machinery,  implements  and  tools,  and  certain 
other  minor  classes  of  tangible  personal  property. 


43]  THE  WISCONSIN  INCOME  TAX  43 

The  gloomy  predictions  of  the  early  failure  of  the  Wis- 
consin income  tax  came  to  nothing.  The  constitutionality, 
of  the  law  was  soon  attacked,  but  it  was  upheld.1  In  1913 
it  became  necessary  to  make  the  change  in  the  method  of 
taxing  the  income  of  corporations  which  has  been  described, 
but  otherwise  the  law  remained  unchanged  in  its  essentials 
until  1919.  The  so-called  "  inquisitorial "  character  of  in- 
come tax  legislation,  which  was  made  the  basis  of  one  of 
the  arguments  used  against  the  tax,  as  a  matter  of  fact  was 
rarely  resented.  Little  evidence  has  been  found  of  attempts 
to  defraud.2 

From  1919  to  the  present  a  tendency  to  experiment  with 
the  income  tax  system  has  shown  itself  in  Wisconsin.  In 
1919  the  question  of  raising  soldiers'  bonuses  was  under 
consideration.  The  income  tax,  productive  in  the  past, 
particularly  in  the  later  war  years,  seemed  to  offer  a  fruit- 
ful field,  and  it  was  agreed  that  the  existing  system  could 
be  utilized  for  raising  a  large  sum  of  money  in  a  very 
short  time.  During  the  regular  session  of  the  legislature  a 
soldiers'  bonus  act  was  passed,  containing  the  provision  that 
the  necessary  funds  were  to  be  collected  in  part  from  in- 
come and  in  part  from  property.3  In  the  case  of  the  tax; 
on  individual  incomes,  the  soldiers'  bonus  surtax,  as  it  was 
called,  was  obtained  by  doubling  the  rates  in  each  $1,000  of 
income  with  the  exception  of  the  first  $3,000  of  taxable  in- 
come. At  the  same  time  the  corporation  income  tax  rates 
were  doubled.  This  proposal  came  at  a  time  when  the 
high  federal  income  tax  rates  were  under  a  heavy  fire  of 
criticism,  but  the  trend  of  popular  opinion  was  such  that  a 
referendum  brought  an  overwhelming  majority  for  the  tax. 

1  Income  Tax  Cases,  148  Wis.  456. 

8  K.  K.  Kennan,  "  The  Wisconsin  Income  Tax,"  Annals  of  the  Amer- 
ican Academy,  vol.  Iviii  (March,  1915),  pp.  75,  76. 
*  Laws  of  Wisconsin,  1919,  ch.  667. 


44         STATE  TAXATION  OF  PERSONAL  INCOMES          [44 

Later  in  1919  a  second  increase  was  made.  In  a  special 
session  of  the  legislature  an  educational  bonus  act  was  pas- 
sed, appropriating  an  amount  equal  to*  one-fifth  of  the 
original  bonus  to  men  and  nurses  who  who  served  in  the 
late  war,  to  be  used  for  purposes  of  education.1  The  sec- 
ond surtax  was  computed  by  adding  one-fifth  of  the 
soldiers'  bonus  surtax  to  that  tax  in  the  case  of  both  indivi- 
duals and  corporations.  The  tax  was  to  be  collected  for 
five  years. 

In  spite  of  the  dangers  of  treating  the  income  tax  as  a 
source  of  unlimited  revenue  to  be  drawn  upon  at  will,  par- 
ticularly at  a  time  when  federal  income  taxes  were  under  con- 
stant attack,  proposals  for  increasing  the  Wisconsin  income 
tax  were  put  before  the  legislature  of  1921.  The  place  of 
the  income  tax  in  the  state  revenue  system  showed  signs  of 
becoming  a  political  issue,  with  the  conservative  interests  of 
the  state  aligned  against  the  increases. 

A  change  in  the  Wisconsin  practice  was  made  necessary 
when  the  United  States  Supreme  Court  rendered  a  decision, 
on  March  i,  1920,  to  the  effect  that  the  provision  of  the 
New  York  income  tax  law  which  denied  to  nonresidents 
the  exemptions  permitted  to  residents  was  discriminatory 
and  unconstitutional.  Wisconsin  had  formerly  permitted 
the  individual  exemptions  only  to  residents,  and  although 
the  Wisconsin  Supreme  Court  had  expressed  grave  doubts! 
as  to  the  constitutionality  of  the  provision,  action  had  been 
delayed  until  a  concrete  case  should  be  brought.  After  the 
New  York  decision  was  rendered  the  tax  commission  con- 
sidered that  it  was  equally  binding  upon  Wisconsin,  and 
ruled  that  in  computing  taxable  income  non-residents  should 
be  allowed  the  same  exemptions  as  those  to  which  they 
would  be  entitled  if  they  were  residents  of  the  state. 

1  Wisconsin   Tax    Commission,    The    Wisconsin   Income    Tax    Law 
(1919),  pp.  60-62. 


45]  THE  WISCONSIN  INCOME  TAX  45 

2.  The  financial  history  of  the  tax 

The  Wisconsin  income  tax  was  a  financial  success  from 
the  first.  When  the  law  went  into  effect  the  opponents  of 
the  plan  made  gloomy  predictions  of  the  probable  yield,  and 
even  the  advocates  of  the  tax  could  not  guarantee  that  an 
untried  revenue  measure  would  prove  its  worth  in  the  first 
year.1 

It  was  freely  prophesied  that  Wisconsin  would  only  duplicate  the 
experiences  of  other  states  and  that  the  amount  collected  would 
scarcely  suffice  to  pay  the  cost  of  collection.  Even  the  friends  of 
the  measure  did  not  estimate  the  probable  yield  at  over  one  mil- 
lion dollars,  and  it  was  realized  that  the  administration  of  the  tax 
would  be  attended  by  many  peculiar  difficulties  in  the  first  year  of 
its  operation.  Under  those  circumstances  there  was  no  small  sur- 
prise when  it  was  found  that  the  income  tax  levy  of  the  first 
year  .  .  .  amounted  to  the  very  respectable  sum  of  $3,591,161.46. 

The  record  of  succeeding  years  shows  that  this  amount 
was  a  minimum  which  has  been  several  times  multiplied  as 
changes  have  occurred  in  the  taxable  income  of  the  state 
and  as  the  administration  of  the  tax  has  'been  improved. 
The  figures  for  the  "  income  tax  levy  "  used  by  Mr.  Ken- 
nan  in  estimating  the  productiveness  of  the  tax  must  be 
pared  down  when  the  actual  cash  yield  to  the  state  is  de- 
sired, for  the  personal  property  tax  offset  has  been  so  ex- 
tensively used  in  paying  income  taxes  that  the  original  in- 
come tax  levy  has  sometimes  been  cut  in  half.  The  record 
of  cash  paid  in  (excluding  the  personal  property  tax  off- 
sets) during  the  period  covered  by  the  operation  of  the  law1 
is  as  follows : 2 

1  Kennan,  op.  cit.,  p.  73. 

5  Wisconsin  Tax  Commission,  Report,  1920,  p.  32. 


46         STATE  TAXATION  OF  PERSONAL  INCOMES          [46 

Year  of  assessment  Cash  collections 

(on  incomes  of  previous  year) 

1912 $1,631,413 

1913 1,935347 

1914 2,002,213 

1915 1,906,442 

1916 2,098,767 

1917 • 6,037,719 

1918 6,951,483 

1919 6,243,376 

The  conspicuous  increases  which  first  became  apparent  in 
the  collections  for  the  assessment  year  1917  were  regarded 
by  the  state  tax  commission  as  "  abnormal "  and  "  due  to 
abnormal  business  conditions."  The  commission's  warn- 
ing that  "  the  permanent  value  of  income  taxation  "  could 
not  be  "  judged  by  the  returns  for  these  abnormal  years  "  * 
furnishes  one  of  the  instances  of  the  scepticism  of  the  pos- 
sibilities of  income  taxation  which  still  exists  even  on  the 
part  of  those  who  support  the  tax. 

Estimates  of  the  financial  success  of  the  income  tax  in 
Wisconsin  require  the  separation  of  the  revenue  from  the 
tax  on  the  incomes  of  individuals  from  the  proceeds  of 
the  tax  on  the  income  of  corporations,  as  the  taxation  of 
individual  incomes  is  now  regarded  to  be  a  distinct  question 
and  one  which  is  believed  to  demand  separate  legisla^ 
tion.  Figures  furnished  by  the  Wisconsin  tax  commission 
show  that  the  levy  on  the  income  of  individuals  has  formed 
from  one-third  to  one-fourth  of  the  total  levy  throughout 
the  greater  part  of  the  period  of  the  operation  of  the  tax.2 
In  the  assessment  of  1920  the  levy  on  personal  incomes  re- 
presented almost  exactly  one-third  of  the  total  levy,  ex- 
clusiye  of  the  amounts  assessed  as  soldiers'  bonus  surtaxes. 
In  the  assessment  of  1919  the  corresponding  fraction  was 
one-fourth. 

1  Report,  1918,  p.  5. 
1  Report,  1920,  p.  61. 


47]  THE  WISCONSIN  INCOME  TAX  47 

The  real  significance  of  the  revenue  from  the  income  tax- 
in  Wisconsin  can  be  appreciated  only  by  means  of  a  com- 
parison wkh  other  income  taxes,  particularly  the  federal  in- 
come tax,  and  with  the  other  sources  of  state  revenue.  On 
the  assumption  that  the  actual  cash  collections  in  Wisconsin 
are  derived  from  individuals  and  corporations  in  approxi- 
mately the  same  ratio  as  the  original  levies,  individuals  paid 
in  cash  as  taxes  to  the  state  of  Wisconsin  about  $1,600,000 
on  incomes  received  in  1918.  The  federal  government's! 
collections  on  individual  incomes  in  Wisconsin  for  that  year 
amounted  to  $11,382,000  or  about  seven  times  as  much  as! 
the  state  collections.1 

A  satisfactory  comparison  of  the  revenue  from  the  Wis- 
consin income  tax  and  the  other  sources  of  state  revenue 
cannot  'be  made,  since  Wisconsin  distributes  the  major  part 
of  the  proceeds  of  the  tax  to  the  local  units  instead  of  re- 
taining them  as  a  part  of  the  state  funds.  If  the  state  ab- 
sorbed all  the  income  tax  receipts  in  addition  to  its  ordinary 
revenue,  the  ratio  of  income  tax  collections  to  total  state 
receipts  would  be  (roughly)  one  to  five.  Even  with  the  10 
per  cent  share  of  the  proceeds  which  the  law  assigns  to 
the  state  itself  the  surplus  for  the  state  is  large.  This  per- 
centage, originally  intended  to  cover  merely  the  cost  of  ad- 
ministration, has  yielded  in  the  last  three  years  more  than 
$600,000  annually,  while  the  cost  of  collection  was  estimated 
at  approximately  $160,000  in  1919-1920* 

The  low  cost  of  collecting  the  income  tax  has  been  em- 
phasized by  the  Wisconsin  'officials  from  the  time  when  the 
results  of  the  tax  first  became  apparent.  Within  the  first 
two  or  three  years  it  was  discovered  that  the  10  per  cent  of 
the  proceeds  which  was  assigned  to  the  state  not  only 

3  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 
*  Wisconsin  Tax  Commission,  Report,  1920,  p.  65. 


48         STATE  TAXATION  OF  PERSONAL  INCOMES          [48 

covered  the  cost  of  collection  (but  defrayed  the  entire  ex- 
pense of  all  of  the  activities  of  the  state  tax  commission.1 
On  the  basis  of  cash  collections  the  cost  has  ranged  from 
one  to  nearly  three  per  cent.2  On  the  basis  of  assessments 
this  figure  for  the  cost  of  collection  appears  very  much 
lower.  The  presentation  of  personal  property  tax  receipts 
as  offsets,  a  practice  which  does  away  with  nearly  one-half 
of  the  tax  payments  which  would  otherwise  be  made,  is  a 
process  which  requires  accounting  and  is  represented  by  an 
administrative  cost  but  which  reduces  the  cash  amounts  on 
the  basis  of  which  the  administrative  costs  are  estimated  in 
percentages.  As  a  result  the  cost  appears  larger  than  it 
would  otherwise  'be.  A  further  difficulty  in  estimating  the 
cost  exactly  is  the  fact  that  the  local  treasurers  collect  the 
income  tax  with  practically  no  increase  in  compensation. 

A  second  method  of  judging  the  cost  of  collection  is  that 
of  estimating  the  cost  of  each  return  handled.  In  1920, 
206,626  individual  returns  and  12,000  corporation  returns 
were  filed.  The  cost  of  administration  of  this  division  of 
the  tax  commission's  work,  reported  as  approximately 
$160,000  for  the  year,  means  a  cost  per  return  of  about  $.75. 

Throughout  its  operation  the  income  tax  in  Wisconsin 
has  been  primarily  an  uit>an  tax.  Milwaukee  alone  contri- 
butes almost  one-half  of  the  revenue  from  the  tax. 
Farmers  paid  only  13.6  per  cent  of  the  tax  on  1919  incomes.3 
Probably  less  than  one-half  of  the  rural  population  is  liable 
to  the  tax,  for  the  small  cash  profits  from  farming  opera- 
tions and  the  numerous  exemptions  combine  to  exclude  a 
large  part  of  the  agricultural  population  from  the  act.  On 

1  T.  E.  Lyons,  "  The  Wisconsin  Income  Tax,"  Annals  of  the  Amer- 
ican Academy,  vol.  Iviii  (March,  1915) ,  p.  82. 

'Wisconsin  Tax  Commission,  Reports,  1914,  p.  126;  1916,  p.  69;  1920, 
P-  65. 

3  Report,  1920,  pp.  34,  64. 


49]  THE  WISCONSIN  INCOME  TAX  49 

the  other  hand,  city  workers  with  moderate  incomes  do  not 
escape.  The  largest  single  number  of  the  individuals  asses- 
sed (one- fourth  of  the  whole  number)  were  mechanics  and 
tradesmen.  These  individuals  paid  more  than  one-fifth  of 
the  total  amount  of  taxes  on  personal  incomes  for  1919. 

A  comparison  of  the  Wisconsin  tax  with  the  federal  tax 
shows  that  the  proportion  of  the  income  taxes  paid  by  the 
poorer  people  is  somewhat  greater  in  Wisconsin  than  in  the 
country  as  a  whole,1  a  fact  which  is  the  natural  conse-i 
quence  of  the  lower  exemptions  under  the  Wisconsin  law 
and  of  the  fact  that  Wisconsin  is  the  state  of  residence  of 
relatively  few  of  the  largest  individual  income  taxpayers  in 
the  country. 

Another  anomaly  which  has  been  observed  in  Wiscon- 
sin has  a  wholly  different  origin.  The  provision  of  the 
Wisconsin  law  that  70  per  cent  of  the  income  taxes  derived 
from  property  or  business  in  a  given  locality  shall  be  paid 
to  the  district  has  resulted  in  curious  situations  in  certain 
rural  districts  where  few  individuals  are  liable  to  the  in- 
come tax.2  Heavy  income  taxes  were  paid  in  certain  small 
rural  districts  of  this  kind  as  the  result  of  the  operations  of 
manufacturing  establishments  located  within  their  borders. 
The  local  communities  contributed  little  to  the  income  of 
such  establishments,  but  in  a  few  cases  they  received  extra- 
vagantly large  sums  when  the  proceeds  of  the  tax  were  dis- 
tributed, particularly  during  the  war  boom.  The  appropria- 
tion of  a  larger  part  of  the  proceeds  of  the  income  tax  by 
the  state  and  the  limitation  of  the  amount  payable  to  a  local- 
ity to  a  certain  percentage  of  the  assessed  valuation  are  two 
of  the  remedies  which  have  been  suggested. 

lCf.  United  States  Internal  Revenue,  Statistics  of  Income  for  1918, 
p.  21,  and  Wisconsin  Tax  Commission,  Report,  1920,  p.  33. 

*  T.  E.  Lyons,  "  Distribution  of  Income  Taxes  to  Localities,"  Bulletin 
of  the  National  Tax  Association,  vol.  v,  no.  3  (Dec.,  1919),  pp.  73-75. 


50         STATE  TAXATION  OF  PERSONAL  INCOMES          [50 

3.  The  outlook  for  the  income  tax  in  Wisconsin 

After  nearly  a  decade  of  operation  the  success  of  the  in- 
come tax  in  Wisconsin  seems  to  be  beyond  question.  The 
statement  of  the  state  tax  commission  in  1918,  made  with- 
out foreknowledge  o>f  the  extensions  which  the  tax  was  to 
undergo  in  1919,  shows  an  appreciation  of  the  productive 
power  of  this  form  of  taxation.1 

Results  have  been  satisfactory.  .  .  .  The  increase  in  the  tax  is 
not  confined  to  any  particular  locality  or  localities  but  is  general 
throughout  the  state.  The  gradual  and  steady  increase  under 
normal  conditions  is  doubtless  due,  first,  to  the  fact  that  under 
such  conditions  there  is  a  steady  growth  in  business  from  year  to 
year  throughout  the  state  and,  second,  because  of  the  increased 
efficiency  in  administration.  The  conclusion  from  the  foregoing 
is  that  a  constant  increase  in  revenue  from  income  taxation  may 
be  confidently  expected,  subject  of  course  to  fluctuations  due  to 
occasional  abnormal  expansion  or  contraction  of  business. 

The  policy  of  utilizing  the  income  tax  to  raise  large  sums 
of  money  for  purposes  other  than  the  permanent  needs  of 
the  state  and  the  localities  has  already  been  questioned. 
Aside  from  the  difficulties  of  assessing  and  collecting  these 
taxes — difficulties  which  proved  to  be  serious  for  the  Wis- 
consin officials,  owing  largely  to  the  haste  in  which  the  work 
was  required  to  be  done — the  raising  of  such  funds  as  tem- 
porary soldiers'  bonuses  through  this  means  may  tend  to 
produce  dissatisfaction  with  the  tax.  The  separate  reference 
to  the  Wisconsin  tax  as  the  "  soldiers'  bonus  surtax  "  is  a 
minor  aspect  of  the  matter  which  has  undoubtedly  made 
clear  the  purpose  of  the  additions  and  prevented  unthinking 
dissatisfaction  on  the  part  of  the  least  inf ormed  of  the  tax- 
payers. Even  with  all  possible  care,  however,  it  is  danger- 
ous to  regard  incomes  as  an  unlimited  source  of  revenue  for 
all  purposes. 

1  Wisconsin  Tax  Commission,  Report,  1918,  p.  5. 


THE  WISCONSIN  INCOME  TAX  $i 

In  order  to  reach  the  maximum  efficiency  the  state  tax 
commission  held  that  the  Wisconsin  income  tax  law  as  it 
stood  at  the  opening  of  the  year  1921  must  be  amended  in 
several  important  particulars.  The  most  pressing  necessity 
was  believed  to  be  that  of  the  repeal  of  the  provision  allow- 
ing the  personal  property  tax  offset  in  the  payment  of  in- 
come taxes.  The  tax  commission  urged  the  repeal  of  this 
provision  in  its  biennial  reports  oi  1916,  1918,  and  1920. 
This  provision,  originally  incorporated  in  the  law  "  with 
the  idea  of  accomplishing  without  too  violent  a  shock  to  tax- 
ing machinery  the  substantial  elimination  of  personal  pro- 
perty taxation  and  the  substitution  therefor  of  ability  taxa- 
tion "  came  to  be  considered  an  incongruous  feature  of  the 
tax  system.  The  ninth  biennial  report  of  the  state  tax 
commission  contained  a  description  of  the  inequalities  which 
resulted  from  the  retention  of  the  provision : * 

The  absurdity  of  requiring  taxpayers  to  make  elaborate  and 
complicated  reports  of  their  income  and  of  maintaining  an  ex- 
pensive organization  to  assess  it,  only  to  have  the  result  nullified 
by  the  presentation  of  personal  property  tax  receipts,  is  too  plain 
to  require  argument.  If  it  is  the  settled  policy  of  the  state  to  tax 
personal  property,  then  no  reason  is  apparent  why  the  owner 
thereof  should  be  favored  as  compared  with  the  owner  of  real 
estate.  To  do  so  is  to  perpetuate  discrimination  between  the 
owners  of  different  classes  of  property. 

Aside  from  this  inequality  the  offset  provision  offers  constant 
inducement  to  false  classification  in  making  the  assessment.  It  is 
to  the  interest  of  those  having  income  taxes  to  pay  to  have  as 
large  a  personal  property  offset  as  possible,  and  local  assessors 
are  constantly  urged  to  assess  fixed  machinery,  permanent  build- 
ings on  leased  land  and  other  forms  of  real  estate  as  personalty 
for  the  purpose  of  offset. 

The  urgent  appeals  of  the  commission  were  not  without 
effect,  and  at  the  time  of  the  1919  session  of  the  legisla- 

1  Wisconsin  Tax  Commission,  Report,  1918,  p.  7. 


£2          STATE  TAXATION  OF  PERSONAL  INCOMES  [52 

ture  the  taxation  committee  of  the  assembly  held  hearings 
on  the  question  of  repealing  the  offset  provision.  The 
business  interests  of  the  state  appeared  to  be  almost  united 
in  opposing  the  repeal.  The  principal  argument  against  the 
repeal  was  that  it  would  greatly  increase  the  taxes  of  the 
persons  with  large  incomes. 

The,  report  of  the  state  tax  commission  for  the  year  1920 
contained  a  detailed  summary  of  the  arguments  for  the  re- 
peal of  'the  offset  provision,  reinforced  by  statistical  sum- 
maries of  the  effect  of  the  use  of  the  offset  upon  cash  collec- 
tions from  the  income  tax.1  This  summary  shows  that  in 
the  course  of  the  eight  years  of  the  collection  of  the  income 
tax  $23,000,000  or  more  than  43  per  cent  of  the  collections 
on  income  taxes  was  paid  by  the  presentation  of  personal 
property  tax  receipts.  The  provision  was  made  use  of 
more  extensively  in  the  cities  than  in  the  towns  and  villages. 

The  offset  provision  was  acknowledged  to  have  been  in- 
troduced to  facilitate  the  elimination  of  the  personal  pro- 
perty tax  through  the  income  tax.  It  was  assumed  that 
upon  the  passage  of  the  income  tax  law  the  taxation  of 
personal  property  in  Wisconsin  would  be  practically  elimin- 
ated. Experience  through  a  period  of  years  showed,  on 
the  contrary,  that  the  income  tax  with  the  adjunct  of  the 
offset  was  in  no  way  displacing  the  personal  property  tax. 
The  assessment  of  personal  property  steadily  increased 
after  the  income  tax  law  was  adopted 

The  objections  urged  by  the  state  tax  commission  in  1920 
was  summarized  as  follows : 

First,  the  offset  provision  is  entirely  foreign  to  any  true 
conception  of  income  taxation  and  tends  to  defeat  rather 
than  to  promote  that  form  of  taxation. 
Second,  it  is  wholly  inconsistent  with  "  ability  taxation." 

1     Wisconsin  Tax  Commission,  Report,  1920,  pp.  31-43. 


]  THE  WISCONSIN  INCOME  TAX  53 

Third,  it  deprives  the  state  and  the  municipalities  therein 
of  large  revenue  to  which  they  are  justly  entitled. 
Fourth,  it  favors  those  best  able  to  pay  and  is1  discriminat- 
ing between  taxpayers, 
Fifth,  in  administration  it  entails  a  waste  of  public  funds. 

Further  changes  in  the  Wisconsin  income  tax  law  recom- 
mended to  the  legislature  of  192 1  were  as  follows : 

The  incorporation  in  the  Wisconsin  law  of  a  provision 
taxing  all  the  incomes  of  residents  whether  earned  at  home 
or  abroad. 

A  change  in  the  section  providing  for  family  exemptions 
so  that  the  Wisconsin  law  might  be  brought  into  harmony 
with  the  decision  of  the  Supreme  Court  of  the  United 
States  *  declaring  the  denial  o>f  exemptions  to  non-residents 
discriminatory  and  the  provision  therefore  null  and  void. 

The  taxation  of  bank  dividends  under  the  income  tax  law. 

An  increase  in  the  rate  of  tax  on  individual  incomes  to 
correspond  at  least  with  the  rate  in  force  on  corporation  in- 
comes. 

In  addition,  the  question  of  including  under  the  income 
tax  law  the  considerable  number  o>f  groups  of  corporations 
whose  income  was  wholly  exempt  from  taxation  by  ex- 
press statute — namely  banks,  public  service  corporations! 
of  all  kinds,  and  several  other  groups — was  submitted  to 
the  legislature  for  consideration. 

The  occasion  for  the  reconsideration  of  the  exclusion  of 
certain  large  classes  of  corporations  from  the  income  tax) 
is  to  be  found  in  the  fact  that  the  period  of  declining  in- 
comes has  arrived,  according  to  the  state  tax  commission. 
Since  the  original  income  tax  law  was  adopted  the  character 
of  succeeding  income  tax  legislation  has  been  progressively 
limiting  to  the  scope  of  the  law.  New  deductions  have 

1  Travis  vs.  Yale  &  Towne  Manufacturing  Co.,  252  U.  S.  60. 


54         STATE  TAXATION  OF  PERSONAL  INCOMES          [54 

been  granted,  old  deductions  have  been  enlarged,  and  the 
term  "  income  "  has  been  restricted  so  as  to  exclude  receipts 
which  were  previously  taxable.  The  tax  commission  does 
not  criticise  the  individual  amendments  in  particular,  but 
emphatically  calls  attention  to  the  fact  that  "  almost  any 
amendment  offered  which  would  in  any  way  lighten  the 
burdens  of  income  taxpayers  has  been  enacted,  while  amend- 
ments suggested  that  would  tend  to  increase  the  revenue 
from  income  taxation  have  been  rejected."  It  is  plain,  the 
report  continues,  that  "if  this  process  of  elimination  of 
taxable  incomes  goes  on  long  enough  and  no  substitute  is 
adopted,  the  Wisconsin  income  tax  law  will  become  a  mere 
shadow."  1  With  the  decline  in  incomes  after  the  return  to 
peace  conditions  there  is  liable  to  be  a  falling-off  in  the  net 
returns  from  the  income  tax  unless  this  trend  of  legislation 
is  recognized  in  all  its  aspects  and  steps  are  taken  to  counter- 
balance it.  For  this  reason  several  of  the  recommendations 
made  to  the  legislature  of  1921  are  concerned  with  methods 
of  expanding  the  revenue  from  the  income  tax. 

The  movement  to  include  under  the  tax  all  income  of 
residents  wherever  derived  is  one  which,  if  successful,  will 
bring  Wisconsin  into  line  with  the  states  which  have  re- 
cently adopted  income  taxes.  Even  Massachusetts  and 
North  Carolina,  which  tax  income  of  specified  kinds  only, 
apply  those  taxes  to  the  income  of  residents  whatever  the 
source  from  which  such  income  is  derived. 

The  commission's  recommendation  that  the  rate  of  taxa- 
tion on  individual  incomes  should  be  increased  to  correspond 
with  that  on  corporation  incomes  has  little  to  support  it  at 
the  present  juncture.  The  commission  "  can  see  no  reason 
why  an  income  whether  received  by  a  corporation  and  in- 
dividual should  not  bear  the  same  rate  just  as  the  same  rate 

1  Report,  1920,  p.  46. 


55]  THE  WISCONSIN  INCOME  TAX  55 

of  taxation  is  applied  to  real  and  personal  property  whether 
owned  by  an  individual  or  corporation."  i  The  inapplica- 
bility of  a  comparison 'between  income  and  property  for  pur- 
poses of  taxation  according  to  ability  is  generally  admitted, 
however,  and  needs  one  exposition  here.  The  objections  to 
the  commission's  plan  are  two :  first,  the  rates  on  individual] 
incomes  are  already  unusually  high  in  Wisconsin,  and  their 
increase  at  a  time  when  the  federal  rates  are  still  high  is  of 
extremely  doubtful  expediency;  second,  the  justice  and 
desirability  of  the  imposition  of  identical  rates' for  individual 
and  corporate  incomes  are  not  matters  which  can  be  so  easily 
settled.  The  committee  on  model  taxation  is  of  the  opin- 
ion that  the  "  business  tax  "  (in  effect  largely  a  corporation 
income  tax)  should  be  regarded  as  a  mode  of  taxation  quite 
distinct  from  the  taxation  of  personal  incomes,  and  that 
different  scales  of  rates  are  justifiable.  The  committee' si 
suggestions  for  the  proposed  business  tax  in  almost  no  way 
correspond  to  the  present  corporation  income  tax  in  Wis- 
consin, a  fact  which  suggests  that  using  this  tax  as  a  kind 
of  norm  might  be  fraught  with  difficulty  in  the  future. 

Although  the  Wisconsin  income  tax  is  undoubtedly  in 
need  of  certain  amendments  along  the  lines  of  some  of  those 
which  have  been  suggested  by  the  state  commission,  in  order 
to  be  brought  into  adjustment  with  present  income  tax; 
practice  in  this  country  and  with  financial  affairs  within  the 
state,  the  success  and  the  historical  significance  of  the  law 
can  hardly  be  overstimated.  The  leaders  of  the  income  tax 
movement  took  a  bold  step  at  a  time  when  the  state  income 
tax  was  in  disrepute  in  this  country  among  the  men  who  had 
tried  to  administer  it  and  among  the  students  of  taxation 
who  had  analyzed  its  history  as  a  revenue-producer.  With 
the  use  of  great  skill  and  a  willingness  to  learn  from  the. 

1  Report,  1920,  p.  45. 


56          STATE  TAXATION  OF  PERSONAL  INCOMES          [56 

experience  of  other  states  anad  other  countries,  the  first 
law  was  drafted  in  such  a  way  that  the  principal  pitfalls  of 
American  state  income  taxes  of  the  past  were  avoided :  the 
rates  were  made  sufficiently  high,  the  tax  was  made  a 
general  income  tax,  and  a  new  type  of  centralized  admin- 
istration, safeguarded  from  political  exploitation  as  far  as 
possible,  was  devised.  In  view  of  the  care  with  which  the 
system  was  planned,  it  is  not  strange  that  Wisconsin  was 
the  first  state  to  make  the  income  tax  a  smoothly  working 
fiscal  measure  and  at  the  same  time  a  source  of  great  rev- 
enue. 

The  excellence  of  many  of  the  provisions  of  the  original 
Wisconsin  law  is  now  widely  recognized.  In  the  prepara- 
tion of  a  draft  oi  a  model  personal  income  tax  law  (Ap- 
pendix II)  the  National  Tax  Association's  committee  on  a 
model  system  of  state  and  local  taxation  utilized  many  por- 
tions of  the  Wisconsin  law,  and  followed  fairly  closely  the 
outline  of  administration  which  has  ibeen  perfected  in  Wis- 
consin, for  it  is  this  field  that  Wisconsin's  contribution 
has  been  the  greatest.  The  best  modern  opinion  has  now 
turned  against  rates  as  high  as  those  used  in  Wisconsin,  is 
opposed  to  limiting  the  income's  taxed  to  those  derived 
within  the  state,  and  is  unconditionally  against  the  use  of 
such  devices  as  the  personal  property  tax  offset;  >but  the 
superiority  of  Wisconsin's  administrative  machinery  has 
never  been  questioned.  It  would  hardly  be  an  exaggera- 
tion to  say  that  the  success  of  state  income  taxes  in  the  last 
few  years  of  their  history  has  been  due  largely  to  the 
adaptation  and  use  of  the  plan  of  centralized  and  specialized 
administration  of  the  state  income  tax  which  was  first  used 
by  Wisconsin  in  1911. 


CHAPTER    III 

THE  TAXATION  OF  INCOMES  IN  MISSISSIPPI 
AND  OKLAHOMA 

THE  adoption  of  the  income  tax  by  Wisconsin  in  1911 
had  far-reaching  consequences  for  other  states  as  well  as 
for  Wisconsin  itself,  but  these  influences  required  time  in 
which  to  make  themselves  felt.  The  law  which  was  the 
immediate  successor  of  the  Wisconsin!  income  tax  law, 
that  of  Mississippi,  showed  no  traces  of  the  experi- 
ment which  was  going  on  in  the  north.  Mississippi,  unlike 
many  of  the  southern  states,  had  had  no  experience  with 
the  early  faculty  taxes  or  with  Civil  War  income  taxes. 
Property  taxes  and  privilege  taxes  made  up  the  greater  part 
of  the  revenue.  The  latter  proved  unsatisfactory  and  un- 
equal, as  they  have  so  generally  become  where  they  are  ex- 
tensively used,  and  in  1912  it  was  decided  that  the  income 
tax  should  be  tried  out.  Unfortunately  the  tax  was 
modelled  after  that  of  the  nearest  neighbor  with  an  income 
tax,  Oklahoma,  which  had  been  trying  to  collect  a  tax  of 
the  older  type,  and  the  Wisconsin  devices  were  ignored. 
Apparently  the  law  was  handicapped  from  the  beginning. 
In  addition  to  the  defects  of  the  Oklahoma  type  of  law  to 
which  Mississippi  fell  heir,  the  Mississippi  law  of  1912  con- 
tained an  error  in  phrasing  which  could  not  be  remedied 
until  I9I4,1  so  that  its  operation  was  delayed. 

1  Laivs  of  Mississippi,  1912,  ch.  101 ;  1914,  ch.  116. 
57]  57 


58         STATE  TAXATION  OF  PERSONAL  INCOMES          [58 

i.  The  present  Mississippi  tax 

By  the  terms  of  the  act  of  1912,  which  is  still  in  force,  a 
tax  of  one-half  of  one  per  cent  is  levied  upon  all  individual 
incomes  in  excess  of  $2,500.  Expenses  of  doing  business 
and  ad  valorem  taxes  paid  may  be  deducted  from  income. 
The  proceeds  go  to  the  general  state  fund.  The  enforce- 
ment of  the  law  and  the  other  duties  of  administration  are 
left  to  the  state  auditor  and  the  regular  county  assessors. 

The  Mississippi  income  tax  has  never  yielded  a  large 
revenue.  Before  1918  the  tax  could  never  be  counted  upon 
to  yield  more  than  $25,ooo.1  In  later  years,  with  the 
growth  of  money  incomes  in  the  country,  the  receipts  have 
more  than  doubled,  but  they  still  form  only  a  very  small 
percentage  2  of  the  total  tax  receipts  of  the  state. 

Year  Income  tax  receipts   * 

1918 $31,123 

1919 51,426 

1920 68,877 

The  small  return  from  the  income  tax  in  Mississippi  is 
brought  out  even  more  clearly  by  a  comparison  with  the 
amounts  collected  in  Mississippi  by  the  federal  government 
in  a  corresponding  period.  The  federal  income  tax  receipts 
from  the  state  for  1918  were  $3,542,849,*  or  more  than  100 
times  as  great  as  the  s^tate  collections. 

The  cost  of  administering  the  income  tax  in  Mississippi 
is  not  separately  calculated,  for  the  matter  is  handled  by 
officials  who  are  elected  for  other  duties.  That  part  of  the 

1  Joint  Report  of  the  (Mississippi)  Senate  and  House  Committee  to 
Consider  the  State's  Revenue  System  and  Fiscal  Affairs,  Submitted  to 
the  Regular  Session  of  1918,  p.  42. 

1  One  per  cent  in  1918. 

8 Statement  of  the  Auditor  of  Public  Accounts,  January  18,  1921. 

4  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 


59]         INCOMES  IN  MISSISSIPPI  AND  OKLAHOMA  $g 

tax  which  is  collected  by  the  revenue  agent  costs  20  per  cent 
of  the  amount  collected  (the  revenue  agent's  commission) 
and  the  remaining  80  per  cent  is  turned  over  to  the  state. 

2.  Efforts  to  reform  the  Mississippi  law 

The  Mississippi  income  tax  law  was  regarded  as  a  failure 
almost  from  the  first  and  repeated  efforts  have  been  made 
to  substitute  a  more  effective  measure.  The  Senate  and 
House  Committee  on  Revenue  which  reported  in  1918  re- 
cognized the  fact  that  changes  in  income  tax  practice  had 
come  about  since  1912,  and  recommended  sweeping! 
changes : x 

The  present  income  tax  law  of  Mississippi  should  be  repealed 
outright.  We  recommend  the  passage  of  a  law  with  progressive 
rates,  taxing  incomes  of  both  individuals  and  corporations.  .  .  . 
The  law  we  submit  is  an  adaptation  of  the  Wisconsin  and  Federal 
income  tax  statutes  to  Mississippi  conditions.  ...  It  is  necessary 
that  the  State  Tax  Commission  be  given  administration  of  the 
law,  and  that  they  should  be  provided  with  funds  to  administer 
it  properly.  Its  success  or  failure  is  solely  a  matter  of  adminis- 
tration. 

'Meanwhile  the  state  tax  commission  was  exposing  the 
defects  of  the  existing  tax  system  and  advocating  a  net  in- 
come tax  to  reach  business  incomes,  with  the  necessary  ad- 
ministrative provisions,  as  a  substitute  for  privilege  taxes.2 

A  bill  embodying  the  recommendations  of  the  Joint  Com- 
mittee was  introduced  in  the  legislature  of  1918,  and  was 
passed  in  the  house  but  defeated  in  the  senate.  The  state 
tax  commission  at  once  resumed  its  persevering  appeals  for 
the  abolition  of  the  existing  law,  urging  that  the  repeal  was 
desirable  even  if  a  better  law  could  not  be  substituted.3 

1  Joint  Report,  pp.  41,  42. 

2  Mississippi  Tax  Commission,  Report  for  1017,  pp.  n,  20. 

3  Mississippi  Tax  Commission,  Report  for  1919,  pp.  31,  32. 


60          STATE  TAXATION  OF  PERSONAL  INCOMES  [60 

The  Legislature  would  do  well  to  substitute  an  income  tax  for  the 
privilege  tax.  It  might  be  well  for  this  to  be  done  by  degrees  in 
order  that  the  State  will  not  be  denied  any  needed  revenue.  A 
tax  on  business  should  be  measured  by  the  net  amount  of  the  in- 
come of  the  business.  .  .  .  The  imposition  of  an  income  tax 
along  with  the  ad  valorem  tax  will  reach  practically  all  who 
should  contribute  funds  for  the  support  of  the  State  Government. 
With  the  offset  of  one  against  the  other,  there  will  not  be  double 
taxation. 

At  the  same  time  the  commission  expressed  its  criticism 
of  the  state  privilege  taxes  and  of  the  methods  of  taxing 
personal  property.  The  privilege  taxes  were  described  as 
imposed  on  business  unequally  and  therefore  unjustly.  For 
example,  "  a  lawyer  who  has  a  practice  of  one  thousand 
dollars  per  annum  pays  as  much  as  one  who  has  a  practice 
of  twenty  thousand  dollars  per  annum."  The  personal  pro- 
perty taxes  in  their  turn  are  in  a  confused  state.  The) 
method  of  taxing  money  penalizes  the  honest  man ;  that  of 
taxing  deposits  has  driven  large  sums  into  other  states, 
and  the  burden  is  borne  by  land  and  tangible  property. 
'  There  are  professional  men,  making  enormous  incomes, 
who  pay  nothing,  practically,  because  they  own  no  tangible 
property.  Their  deposits,  cash  on  hand  and  customer's  ac- 
counts cannot  be  found  by  the  Assessor."  x 

In  spite  of  the  urgent  recommendations  of  the  state  tax 
commission,  repeated  from  year  to  year,  the  legislature  of 
1920  not  only  failed  to  change  the  income  tax  law  of  the 
state,  but  even  increased  the  taxes  on  some  privileges  more 
than  loo  per  cent,  with  an  average  increase  of  40  per 
cent.2  The  inadequate  personal  income  tax  law  of  1912 
still  stands,  therefore,  along  with  the  unsatisfactory  system 
of  privilege  and  property  taxes. 

1  Ibid.,  p.  32. 

*  Bulletin  of  the  National  Tax  Association,  vol.  v,  no.  9  (June,  1920), 
p.  271. 


<5i]         INCOMES  IN  MISSISSIPPI  AND  OKLAHOMA  6 1 

Assistance  appeared  from  an  unexpected  quarter  when 
the  supreme  court  of  the  state,  in  a  decision  announced  early 
in  1921,  held  that  corporations  were  subject  to  the  tax. 
Reference  was  made  to  a  statute  denning  a  "  person  "  (the 
term  used  in  the  income  tax  law)  as  including  a  corpora- 
tion. Little  additional  revenue  could  be  expected  in  the 
immediate  future,  however,  as  the  result  of  this  decision. 
The  question  of  ascertaining  income  derived  within  the 
state  was  left  untouched,  and  complications  •seemed  certain 
to  arise.  Moreover,  the  allowance  of  an  offset  for  ad 
valorem  taxes  paid  destroys  much  of  the  efficacy  of  the  tax. 

The  future  of  the  income  tax  in  Mississippi  is  uncertain 
for  another  reason.  It  is  true,  as  the  state  tax  commission 
admits  in  advocating  the  adoption  of  a  tax  law  along  the 
newer  lines,1  that  the  state  cannot  expect  to  have  the  success 
with  an  income  tax  which  manufacturing  states  have  had. 
Mississippi  is  largely  an  agricultural  state,  and  the  farmer's 
inability  to  state  his  exact  income  is  proverbial.  If  taxable 
incomes  from  agricultural  sources  are  to  be  arrived  at,  a 
competent  corps  of  accountants  must  be  provided.  On  the 
other  hand,  the  success  of  the  federal  government  in  tax- 
ing incomes  of  this  kind  is  breaking  down  much  of  the 
scepticism  which  previously  existed.  Accounting  methods 
have  undoubtedly  improved  in  Mississippi,  as  elsewhere. 
The  federal  government  had  nearly  20,000  returns  from 
Mississippi  in  1918,  with  a  reported  net  income  of  more 
than  $70,000, ooo.2  If  these  returns  were  utilized  by  the 
state,  as  the  tax  commission  has  urged,  the  state  income 
tax  could  be  made  far  more  effective. 

^Report  for  1919,  p.  32. 

'United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  pp. 
22,  23. 


62          STATE  TAXATION  OF  PERSONAL  INCOMES  [62 

3.  The  history  of  the  Oklahoma  tax 

The  third  state  to  enact  important  income  tax  legislation 
in  this  period  was  Oklahoma,  which  passed  a  new  law  in 
1915.  Oklahoma  already  had  an  income  tax  law  of  the 
older  type,  which  had  been  provided  for  at  the  time  of  the 
organization  of  the  state  government.  The  constitution 
adopted  in  1907  included  a  provision  for  graduated  income 
taxes,1  and  a  law  imposing  a  professional  income  tax  was 
passed  almost  immediately.2  According  to  the  terms  of 
this  law  a  graduated  tax  was  laid  on  all  incomes  from 
salaries,  fees,  professions,  and  property  in  excess  of  $3,500 
upon  which  a  gross-receipts  or  excise  tax  had  not  been 
paid.  The  law  applied  to  personal  incomes  only.  The 
rates  progressed  from  one-half  of  one  per  cent  on  incomes 
from  $3,500  to  $5,000  to  three  and  one-third  per  cent  on 
amounts  in  excess  of  $100,000. 

The  income  tax  law  of  1907-1908  was  unquestionably  a 
failure.  The  law  was  unpopular  with  the  taxpayers,  the 
machinery  for  enforcement  was  lacking,  and  the  returns) 
were  negligible.  In  the  first  four  years  of  its  operation  the 
state  received  less  than  $5,000  annually  in  income  taxes. 
After  recording  the  insignificant  amounts  yielded  by  the 
tax  during  the  whole  period  of  its  operation,  the  state 
auditor  urged  in  1912  that  the  law  should  be  thoroughly 
revised  or  repealed.3 

The  law  has,  in  my  opinion,  proven  a  failure  as  a  revenue  pro- 
ducer for  the  State.  ...  No  uniformity  prevails  in  making  in- 
come tax  returns  —  there  were  as  many  definitions  for  the  term 
"  gross  income  "  as  there  were  persons  examined.  .  .  .  This  is  a 

1  Constitution  of  the  State  of  Oklahoma,  art.  x,  sec.  12. 
a  Laws  of  Oklahoma,  1907-08,  ch.  81. 

1  Third  Biennial  Report  of  the  State  Auditor  of  Oklahoma,  1912,  pp. 
235,  236. 


63]         INCOMES  IN  MISSISSIPPI  AND  OKLAHOMA  63 

chaotic  condition  and  unless  the  next  Legislature  deems  it  advis- 
able to  amend  the  law  "  in  detail "  I  would  recommend  that  the 
act  be  repealed. 

After  repeated  recommendations  of  this  kind  had  been 
made,  the  legislature  of  1915  undertook  a  drastic  revision 
of  the  whole  income  tax  law.1  The  tax  was  applied  to  the 
entire  net  income  of  each  and  every  person  in  the  state  and 
to  income  from  property  owned  or  business  carried  on  in 
the  state  by  persons  residing  elsewhere.  Deductions  for 
ordinary  business  expenses,  taxes,  losses,  and  bad  debts  were 
permitted.  The  exemptions  were  $3,000  for  the  individual 
$4,000  for  husband  and  wife  together,  $300  for  each  child 
under  18,  and  $200  for  each  other  dependent.  The  allow- 
ance for  a  child  or  dependent  became  $500  for  each  child 
or  dependent  engaged  solely  in  acquiring  an  education. 
The  proceeds  were  assigned  to  the  current  expenses  of  the 
state  government.  The!  administration  remained  in  the 
hands  of  the  state  auditor. 

The  following  schedule  of.  rates  was  adopted : 

Taxable  income  of  individuals  Rate  (per  cent) 

ist  $10,000    I 

Next  $15,000 2 

Next  $25,000 3 

Next  $50,000 4 

Additional  amounts  (i.  e.,  above  $100,000) 5 

In  1917  the  rates  were  decreased  and  the  following* 
schedule  was  adopted : 2 

Taxable  income  of  individuals  Rate  (per  cent) 

ist  $10,000   75 

Next  $15,000 1.50 

Additional  amounts  (i.  e.,  above  $25,000)   2.00 

lLaws  of  Oklahoma,  1915,  ch.  164. 
*  Laws  of  Oklahoma,  1917,  ch.  265. 


64         STATE  TAXATION  OF  PERSONAL  INCOMES          [64 

The  law  remained  in  other  important  respects  the  same,  and 
is  still  customarily  referred  to  as  the  law  of  1915. 

Increased  collections  immediately  resulted  from  the 
changes  made  in  1915.  The  tax  yielded  slightly  more  than 
$250,000  for  the  year  1915  and  over  $400,000  for  the  year 
1916.  The  amount  yielded  for  1916  was  greater  than  the 
combined  collection  of  the  preceding  seven-year  period. 

The  collections  in  1919  (on  1918  incomes)  reached  ap- 
proximately $500,000, x  or  about  seven  per  cent  of  the  state's 
receipts  from  taxes  for  igiS.2  The  cost  of  collection  is 
probably  between  two  and  three  per  cent  of  the  amount 
collected.3 

Oklahoma  is  obviously  one  of  the  poorer  states,  and  large 
sums  from  income  taxes  cannot  be  expected.  Judged  only 
by  relative  standards,  however,  the  state  income  tax  is  not 
a  prime  source  of  revenue.  Oklahoma  is  collecting  only  about 
one-fifteenth  as  much  as  the  federal  government  collects1 
from  income  taxes  in  the  state,*  while  Wisconsin  collects 
one-seventh  as  much.  The  state  has  continued  to  exhibit  a 
desire  to  improve  its  revenue  system,  however,  and  to  ex- 
periment with  new  devices;  so  that  the  agitation  for  the 
revision  oif  the  income  tax  which  sprang  up  again  in  1921 
may  still  result  in  a  tax  law  of  the  modern  type. 

The  right  of  the  state  of  Oklahoma  to  tax  the  incomes  of 
non-residents  has  been  repeatedly  questioned.  A  decision 
of  the  United  States  Supreme  Court  rendered  March  I, 

1  Oklahoma  State  Auditor,  Statement,  April  3,  1920. 

J  United  States  Bureau  of  the  Census,  Financial  Statistics  of  States, 
1918,  p.  70. 

*  Estimated  from  figures  furnished  by  the  Oklahoma  State  Auditor, 
April  3,  1920. 

4  $7,649,280  in  1918.  (United  States  Internal  Revenue,  Statistics  of 
Income  for  1918,  p.  24) . 


65]         INCOMES  IN  MISSISSIPPI  AND  OKLAHOMA  65 

1920,  established  the  validity  of  the  Oklahoma  law.1  In 
the  case  under  consideration,  the  right  of  the  state  to  taxi 
the  income  from  the  oil  properties  in  Oklahoma  of  a  resid- 
ent of  Illinois  was  questioned.  It  was  stated  by  the  court 
that  in  our  system  the  states  have  general  and  except  as 
limited  by  the  federal  constitution,  complete  dominion  over 
all  persons,  property  and  business  transactions,  within  their 
borders.  They  are  not  restricted  to  property  taxes  nor  to 
any  particular  form  of  excises.  To  debar  the  state  from 
exacting  a  share  of  the  gains  derived  wMiin  its  borders  "  is 
a  proposition  so  wholly  inconsistent  with  fundamental  prin- 
ciples as  to  be  refuted  by  its  mere  statement."  Just  as  a 
state  may  impose  general  income  taxes  upon  its  own  citizens 
and  residents,  it  may  levy  a  duty  of  like  character,  and  not 
more  onerous  in  its  effect,  upon  incomes  accruing  to  non- 
residents from  their  property  or  business  within  the  state, 
or  their  occupations  carried  on  therein. 

The  failure  of  income  taxes  to  become  large  revenue-pro- 
ducers in  such  states  as  Mississippi  and  Oklahoma  is  not 
to  be  explained  wholly  by  the  form  of  administration,  im- 
portant as  tha!t  feature  has  been  recognized  to  be  since  the 
inauguration  of  the  Wisconsin  system  in  191'!.  In  com- 
munities which  are  largely  agricultural  the  collection  of 
large  sums  will  probably  always  be  difficult,  for  two  simple 
and  widely  known  reasons :  the  farmer's  income  is  largely  in 
commodities,  not  money,  and  he  is  proverbially  unsystem- 
atic in  account-keeping.  A  third  reason  may  perhaps  be 
found  in  the  fact  that  up  to  the  present  economic  life  has 
been  so  organized  that  it  is  in  industry,  commerce,  and 
finance,  not  in  the  various  forms  of  agriculture,  thalt  the 

1  Charles  B.  Shaffer  vs.  Frank  C.  Carter,  State  Auditor,  and  Abner 
Bruce,  Sheriff  of  Creek  County,  Oklahoma,  U.  >S.  Supreme  Court, 
March  I,  1920,  summarized  in  Bulletin  of  the  National  Tax:  Association 
vol.  v,  no.  6  (March,  1920),  pp.  180-183. 


66         STATE  TAXATION  OF  PERSONAL  INCOMES          [66 

hugest  fortunes  are  made,  so  that  a  community  which  de- 
rives its  income  from  the  soil  is  almost  always  a  community 
of  modest  incomes. 

Even  with  the  necessary  qualifications,  however,  an  in- 
come tax  may  be  the  lesser  o<f  two  tax  evils.  The  tax  on 
intangible  personal  property  becomes  "  a  penalty  on  honesty 
and  a  premium  on  dishonesty,"  in  the  words  of  the  Missis- 
sippi tax  commission,  even  in  these  non-manufacturing^ 
states.  The  southern  states  would  do  well  to  look  more 
closely  into  the  matter  of  income  taxes  suitable  for  local 
conditions,  for  dissatisfaction  with  the  general  property  tax 
is  increasing  throughout  the  country  and  this  dissatisfac- 
tion is  no 'respecter  of  states. 


CHAPTER  IV 
THE  MASSACHUSETTS  INCOME  TAX 

THE  income  tax  law  of  Massachusetts  was  passed  in 
1916,  five  years  after  Wisconsin  made  its  epoch-making 
experiment,  and  was  the  first  measure  which  proved  in  any 
way  comparable  to  that  of  the  latter  state. 

i .  The  earlier  taxation  of  incomes 

Legislation  providing  in  one  form  or  another  for  the 
partial  taxation  of  incomes  has  been  continuously  on  the 
statute  books  of  Massachusetts  since  colonial  times,  although 
the  early  faculty  tax  in  Massachusetts  bore  little  relation 
to  the  modern  income  tax.1 

In  1634  there  was  enacted  in  the  Colony  of  Massachusetts  Bay 
the  first  general  tax  law  in  any  American  colony,  and  included  in 
this  act  was  a  provision  for  the  assessment  of  each  man  "  accord- 
ing to  his  estate  and  with  the  consideration  of  all  other  his 
abilityes  whatsoever".  .  .  .  Gradually  the  faculty  tax  developed 
from  its  original  form  to  an  express  provision  for  the  taxation  of 
income  from  a  profession,  trade,  or  employment  in  excess  of  a 
given  sum.  This  exemption  was  fixed  at  $600  in  the  act  of  1849, 
raised  to  $1,000  in  1866,  and  in  1873,  as  the  result  of  a  compro- 
mise with  those  who  were  then  making  an  endeavor  to  have  the 
tax  entirely  repealed,  was  changed  to  $2,000,  at  which  figure  it 
remained  until  the  present  income  tax  act. 

In  the  latter  part  of  the  nineteenth  century  the  tax  situa- 

1  Massachusetts  Tax  Commissioner,  Report,  1917,  p.  5. 
67]  67 


68          STATE  TAXATION  OF  PERSONAL  INCOMES          [68 

tion  in  Massachusetts  became  serious.1  The  general  pro- 
perty tax  was  becoming  less  and  less  sats factory.  In  the 
period  from  1879  to  1900  the  tax  rates  showed  heavy  in- 
creases, and  real  estate  valuations  were  increased  as  a  re- 
sult. Tangible  personal  property  was  seriously  affected, 
except  where  it  could  escape  by  incorporation.  Intangible 
personal  property  escaped  taxation  in  several  ways.  It 
showed  a  greater  tendency  to  leave  communities  in  which 
tax  rates  were  high  and  to  concentrate  in  certain  residential 
towns  in  which  the  taxpayers  had  a  high  degree  of  control 
over  the  amount  of  their  assessments.  The  wealthiest  re- 
sidential towns  of  the  state  became  more  and  more  favored 
in  their  revenue  from  personal  property  and  from  corpora- 
tion and  bank  taxes.  According  to  Professor  Bullock  "it 
is  probable  that  the  student  of  taxation  would  have  difficulty 
in  finding  elsewhere  such  extreme  concentration  of  taxable 
resources  as  was  gradually  brought  about  in  Massachusetts 
after  1865." 2  In  a  variety  of  ways  it  was  possible  to  evade 
the  assessment  of  personal  property  without  a  change  of 
domicile.  As  a  result  personal  property  paid  a  decreasing 
proportion  of  the  local  taxes.  The  percentage  which  the 
personal  property  assessment  formed  of  the  total  local) 
assessments  declined  from  36.0  in  1850  to  21.8  in  1907. 

During  this  period  of  continually  increasing  complica- 
tions in  the  tax  system  of  Massachusetts  the  income  tax  was 
several  times  under  consideration,  but  it  was  generally  re- 
garded as  an  isolated  survival  of  an  older  order,  whose  use- 
fulness had  become  questionable,  rather  than  as  an  im- 
mediate and  practical  remedy  for  the  disease  with  which 
personal  property  taxation  was  suffering.  In  1870  the  in- 

1  C.  J.  Bullock,  "The  Taxation  of  Property  and  Income  in  Massa- 
chusetts," Quarterly  Journal  of  Economics  vol.  xxxi,  no.  I  (Nov.  1916), 
pp.  24  et  seq. 

2  Bullock,  op.  cit.,  p.  28. 


69]  THE  MASSACHUSETTS  INCOME  TAX  69 

come  tax  was  brought  into  the  public  attention  by  a  court 
decision  that  the  profits  of  merchants  who  employed  taxable 
property  in  their  business  were  not  exempt  from  taxation 
as  derived  from  property  already  taxed  although  for  a 
number  of  years  previous  such  property  had  been  considered 
to  be  exempt.1  This  decision  led  to  the  movement  noted 
above  to  repeal  the  tax,  and  to  the  resulting  compromise  of 
an  exemption  limit  raised  to  $2,000.  In  1875  a  special  com- 
mission on  taxation  reported  that  the  income  tax  was  asses- 
sed in  only  a  few  localities  and  that  the  revenue  yielded 
was  inconsiderable.  Enough  o>f  a  sentiment  was  found  in 
its  favor  to  prevent  a  recommendation  for  repeal,  and  it 
seems  to  have  been  recognized  that  even  with  its  imperfec- 
tions it  was  of  some  importance  in  reaching  the  ability  of 
persons  who  were  inadequately  taxed  under  the  general 
property  tax.  It  is  interesting  to  note  that  at  this  early  date 
a  discovery  was  made  which  did  not  reach  fruition  until 
another  state  began  afresh  more  than  a  quarter  of  a  century 
later :  the  Massachusetts  committee  o*f  1875  reported  that  the 
system  suffered  by  local  administration  and  recommended  a 
"central  supervising  department  of  taxes."  Unfortunately 
the  recommendation  was  not  followed,  and  the  income  tax 
fell  into  still  greater  disrepute.  Severe  criticism  of  the  in- 
justice and  inequality  with  which  the  tax  operated  was  ex- 
pressed by  a  committee  oi  Boston  business  men  in  1889  and 
by  a  committee  of  the  city  oi  Boston  in  1891.*  In  1893  the 
subject  was  again  taken  up  by  a  legislative  committee,  and 
the  questions  of  taxing  both  income  and  the  property  from 
which  it  was  derived  and  of  the  local  inequalities  in  the 
assessment  of  the  tax  were  again  gone  over.  Once  again, 
however,  the  committee  reported  against  the  repeal  of  the: 
tax. 

1  Seligman,  op.  cit.,  p.  391,  et  seq. 

'  Ibid.,  pp.  393,  394- 


70         STATE  TAXATION  OF  PERSONAL  INCOMES          [70 

In  1897  the  income  tax  was  again  investigated  by  a  taxa- 
tion commission.  Figures  showing  the  inadequacy  of  the 
assessment  of  income  in  comparison  with  the  assessment 
of  personalty  in  the  state  were  presented,  and  the  possibility 
of  substituting  a  new  general  state  income  tax  for  the  in- 
creasingly unsatisfactory  property  tax  was  discussed.  This 
commission  was  composed  of  able  men  in  the  tax  field,  and  it 
was  almost  the  first  to  recognize  and  to  express  clearly  the 
relationship  of  the  taxation  of  income  to  the  taxation  of 
property.  Nevertheless  the  commission  concluded  that  the 
traditions  and  habits  of  the  country  at  the  time  were  not 
such  as  would  facilitate  the  administration  of  an  income 
tax  and  reported  against  its  adoption.  For  a  number  of 
years  after  this  carefully-framed  report  was  rendered  the 
question  of  the  abolition  o>f  the  old  tax  and  the  introduc- 
tion of  a  general  state  income  tax  received  little  attention  in 
Massachusetts,  The  situation  with  regard  to  the  taxation 
of  personal  property  was  growing  steadily  worse  but  in- 
terest was  centered  on  minor  reforms  in  the  assessment  of 
property  taxes  rather  than  on  fundamental  changes, 

The  requirements  of  the  law  as  it  stood  at  this  time 
were  briefly  as  follows  : * 

[Personal  estate  for  the  purposes  of  taxation  shall  include:]  .  .  . 
Fourth.  The  income  from  an  annuity  and  the  excess  above  $2,000 
of  the  income  from  a  profession,  trade  or  employment  accruing  to 
the  person  to  be  taxed  during  the  year  ending  on  the  first  day  of 
April  of  the  year  in  which  the  tax  is  assessed.  Income  derived 
from  property  subject  to  taxation  shall  not  be  taxed. 

As  the  terms  of  the  law  indicate,  the  rate  of  taxation  upon 
income    was   not   fixed,    but    was    the    same   as    that  for 
other  property  taxed  under  the  law.     Moreover,  great  free- 
dom o>f  interpretation  was  given  to  the  local  taxing  units, 
1  Laws  of  Massachusetts,  1909,  ch.  490,  part  I,  sec.  4,  as  amended. 


7I]  THE  MASSACHUSETTS  INCOME  TAX  ji 

and  so  long  as  the!  units  made  up  their  part  of  the  total  state 
tax  there  was  no  pressure  upon  them  to  enforce  that  parti- 
cular part  of  the  law  under  which  personal  incomes  were 
subject  to  taxation.  As  a  result  the  scope  of  the  tax  was 
narrow,  the  returns  insignificant  and  irregular,  and  the 
operation  of  the  law  unfair  and  erratic.  As  late  as  1914 
a  critic  comments  as  follows  i1 

The  assessment  of  salaries  and  personal  incomes  has  virtually  dis- 
appeared, except  in  an  occasional  instance  of  a  college  professor 
or  of  a  state  official,  and  in  the  few  cases  where  business  incomes 
.are  assessed  at  all,  the  assessment  is  added  to  the  personal  property 
tax  and  does  not  figure  separately  on  the  tax  books.  What  is 
therefore  still  called  the  income  tax  in  Massachusetts  is  nothing 
but  an  equal  and  entirely  arbitrary  additional  assessment  upon  a 
few  members  of  the  professional  classes  and  a  few  large  business 
men  selected  at  haphazard  in  Boston  and  one  or  two  other  towns. 

In  1911  the  new  point  of  view  with  regard  to  state  in- 
come taxes  which  was  making  itself  apparent  in  Wisconsin 
in  the  passage  of  an  income  tax  law  showed  itself  in  Massa- 
chusetts in  the  governor's  recommendation  to  the  legisla- 
ture of  the  adoption  of  an  income  tax.  It  was  plain  that 
opinion  everywhere  was  changing.  Such  a  proposal  as 
that  which  was  made  in  Massachusetts  was  probably  made 
possible  by  the  submission  to  the  states  of  the  i6th  amend- 
ment (providing  for  a  federal  income  tax).  The  gover- 
nor's recommendation  me*t  with  less  opposition  than  was 
at  first  anticipated,  but  the  difficulties  of  framing  a  satis^ 
factory  income  tax  law  were  advanced  in  many  quarters  as 
reasons  for  prolonging  the  old  system  of  taxation  of  per- 
sonal property.  The  question  of  a  progressive  rate  and 
that  of  the  exemption  from  taxation  of  property  taxed  un- 
der the  income  tax  proved  particularly  troublesome. 
Meanwhile  Wisconsin  was  furnishing  an  example  of  the 

1  Seligman,  op.  tit.,  p.  397. 


72         STATE  TAXATION  OF  PERSONAL  INCOMES          [72 

possible  use  of  a  state  income  tax  and  public  opinion  was 
being  molded  from  within  the  state  by  the  annual  reports 
of  the  state  tax  commissioner  and  by  various  organizations 
representing  special  interests.  In  1914  a  constitutional 
amendment  permitting  the  levy  of  a  proportional  income 
tax  but  not  containing  a  requirement  that  property  taxed 
upon  its  income  must  be  exempted  from  other  taxation 
passed  both  branches  of  the  legislature.  In  1915  the 
amendment  was  again  passed  by  the  legislature,  and  in 
November  of  that  year  it  was  ratified  by  the  people.1  The 
legislature  of  1915  had  appointed  a  special  commission  to 
draft  an  income  tax  law.  This  commission  utilized  a  bill 
prepared  by  the  Massachusetts  Tax  Association  which  was 
in  large  part  the  work  of  Professor  Charles  J.  Bullock  of 
Harvard  University,  and  after  introducing  changes  which 
it  considered  desirable  presented  it  to  the  legislature  of 
1916.  The  bill  became  law  in  the  spring  of  that  year,2  in 
so  workable  a  form  that  in  the  succeeding  years  only 
minor  amendments  have  been  made. 

The  Massachusetts  income  tax  law,  unlike  the  Wisconsin 
law  and  the  majority  o<f  the  laws  which  were  subsequently 
passed,  is  not  a  law  applying  to  all  kinds  of  income.  It 
taxes  only  specified  kinds  of  income,  and  in  order  to  avoid 
double  taxation,  exempts  the  classes  of  income  from  real 
estate,  dividends  of  Massachusetts  corporations,  income 
from  savings  bank  deposits,  and  interest  on  mortgages  se- 
cured by  Massachusetts  real  estate  for  an  amount  equal  to 
the  mortgage.  The  tax  on  intangible  personal  property  was 
abolished. 

1  Laws  of  Massachusetts,  1916,  44th  Amendment  to  the  Constitution, 
PP.  So,  53- 

*  Laws  of  Massachusetts,  1916,  ch.  269.  (An  Act  to  impose  a  tax 
upon  the  income  received  from  certain  forms  of  intangible  property 
and  from  trades  and  professions.) 


73]  THE  MASSACHUSETTS  INCOME  TAX  73 

The  classification  of  the  incomes  taxable,  together  with 
the  differing  rates,  produces  a  separation  of  earned  and  un- 
earned income,  with  a  higher  rate  of  taxation  upon  the 
latter. 

The  four  kinds  of  income  taxed  under  the  Massachusetts 
law  are  as  follows : 

1.  Income   from   intangibles,    taxed   at   six  per   cent. 
(For  the  years  1918  to  1921  inclusive,  the  rate  is  six  and 
one-half  per  cent).1     The  only  exemption  is  the  provision 
that  personM  whose  income  from  all  sources  is  less  than 
$600  may  claim  an  exemption  of  $300. 

2.  Income  from  annuities,  taxed  at  one  and  one-half  per 
cent.     There  is  a  possible  exemption  of  $300,  as  in  the 
case    of    intangibles,     (Annuities    were    formerly    taxed 
locally  at  varying  rates). 

3.  Net  gains  from  dealings  in  intangibles,  taxed  at  three 
per  cent.     This  applies   alike  to   professional   dealers  id 
securities  and  to  speculators  and  private  investors. 

4.  Income    from    professions,    employment,    trade,    or 
business,  taxed  at  one  and  one-half  per  cent.     (For  the 
yours  1918  and  1919  the  rate  is  two  and  one-half  per  cent).21 
Exemptions  are  permitted  of  $2,000   for  the  individual, 
$2,500  for  husband  and  wife,  and  $250   for  each  child 
under  18  or  dependent  parent,  with  a  total  aside  from  that 
of  the  original  $2,000  for  the  individual,  of  not  more  than 
$1,000.     In  addition  to  the  above  taxes,  a  "  war  tax  "  of  10 
per  cent  of  the  taxes  paid  was  required  for  the  years  1918 
and  I9I9.3 

The  act  applies  to  inhabitants  of  Massachusetts,  to  Mas- 
sachusetts partnerships,  to  estates  of  deceased  persons,  and 

1  Laws  of  Massachusetts,  1919,  ch.  342. 
1  Laws  of  Massachusetts,  1919,  ch.  324. 
3  Laws  of  Massachusetts,  1918,  ch.  252. 


74         STATE  TAXATION  OF  PERSONAL  INCOMES          [74 

to  estates  held  in  trust.  Taxes  upon  estates,  partnerships, 
and  trustees  and  other  fiduciaries  are  imposed  only  to  the 
extent  that  the  income  accrues  for  the  benefit  of  an  inhabi- 
tant of  Massachusetts. 

The  act  itself  does  not  apply  directly  to  corporations,  but 
domestic  corporations  are  subject  to  a  tax  of  two  and  one- 
half  per  cent,  similar  to  the  tax  on  incomes  from  profes- 
tions,  employment,  trade,  or  business  described  above.1  This 
tax  is  called  an  excise  tax  on  net  income. 

Massachusetts  followed  the  example  of  the  only  state 
which  up  to  1916  had  made  a  financial  success  of  an  in- 
come tax  law, — Wisconsin — and  centralized  the  admin- 
istration. The  tax  commissioner,  who  was  charged  with 
the  administration  of  the  tax,  was  authorized  to  appoint 
an  income  tax  deputy  to  have  general  charge  of  the  tax- 
ation of  incomes.  The  state  was  to  be  divided  into  dis-i 
tricts,  with  an  income  tax  assessor  for  each  district.  Pro- 
fessor Bullock  comments  as  follows  upon  the  type  of  ad- 
ministration decided  upon : a 

It  was  not  to  be  expected  that  the  tax  would  work  well  if  admin- 
istered in  approximately  three  hundred  and  fifty  ways  by  approxi- 
mately three  hundred  and  fifty  local  boards  of  assessors;  and 
Massachusetts  acted  wisely  in  turning  the  work  over  to  the  Com- 
monwealth. During  the  fifty  years  of  its  existence  the  tax  com- 
missioner's department  has  been  administered  in  a  manner  that  has 
commanded  general  confidence,  and  all  that  needed  to  be  done 
was  to  add  to  its  equipment  a  new  bureau  charged  with  the  assess- 
ment and  collection  of  the  income  tax. 

Massachusetts  adopted  a  system  of  information  at  the 
source  but  which  has  worked  fairly  satisfactorily.  Every 
employer  was  required  to  report  concerning  those  persons! 


1  Laws  of  Massachusetts,  1919,  ch.  355. 
J  Bullock,  op.  cit.,  p.  57. 


75]  THE  MASSACHUSETTS  INCOME  TAX  75 

to  whom  more  than  $1,800  had  been  paid  during  the  pre- 
vious calendar  year.  Corporations  doing  business  in  the 
state  were  also  required  to  report  the  names  of  their  share- 
holders, and  others  to  whom  they  made  payments. 

At  the  time  when  the  terms  of  the  Massachusetts  lawj 
were  worked  out  the  complications  of  the  problem  of  dis- 
tributing the  yield  of  the  income  tax  were  not  as  clearly 
recognized  as  they  are  at  the  present  time;  but  the  local 
difficulties  of  assessing  the  personal  property  tax  had  been 
so  great  and  so  conspicuous  that  pressure  from  that  direc- 
tion resulted  in  a  carefully  made  plan  for  the  use  and  dis- 
position of  the  revenue.  During  the  first  years  of  the 
operation  of  the  law  the  local  taxing  units  were  reimbursed 
according  to  a  carefully  worked-out  formula  for  the  losses 
which  they  were  assumed  to  have  suffered  by  the  elimina- 
tion of  the  old  tax  on  intangible  personal  property.  The 
balance  was  then  distributed  to  the  cities  and  towns  on  the 
same  basis  as  the  assessment  of  the  state  tax.  Expenses! 
of  administration  were  subtracted  before  the  distribution 
was  made.  This  scheme  was  admittedly  only  temporary, 
and  in  1919  a  scheme  was  adopted  by  which  a  gradually  de- 
creasing amount  of  the  proceeds  of  the  income  tax  should 
be  distributed  in  reimbursement  for  losses  from  the  per- 
sonal property  tax,  and  a  correspondingly  increasing 
amount  should  be  distributed  in  proportion  to  the  amount 
of  the  state  tax.1  After  1928  the  whole  amount  of  the 
revenue  from  the  income  tax  was  to  be  distributed  accord- 
ing to  the  amount  of  the  state  tax  assessed.  This  plan  was 
interfered  with  by  a  law  passed  shortly  after  it  wasi 
adopted,2  as  a  part  of  the  education  act.  According  to  the 
terms  of  this  law  a  permanent  plan  of  reimbursement  to 

1  Laws  of  Massachusetts,  1919,  ch.  314. 

2  Laws  of  Massachusetts,  1919,  ch.  363. 


76         STATE  TAXATION  OF  PERSONAL  INCOMES          [76 

the  cities  and  towns  for  school  expenditures  was  adopted. 
A  scale  oi  partial  reimbursements  for  salaries  according  to 
the  amounts  received  by  teachers  and  other  educational 
officials  and  a  second  scale  oi  reimbursements  graduated 
according  to  the  ratio  oi  the  valuation  of  real  and  personal 
property  to  net  average  membership  in  public  day  schools, 
so  that  the  towns  with  the  smallest  valuations  in  proportion 
to  school  attendance  should  receive  the  largest  amount  of 
assistance,  were  adopted  at  the  same  time.  About 
$4,000,000  was  distributed  in  this  way,  with  excellent  re- 
sults as  far  as  the  raising  of  teachers'  salaries  was  con- 
cerned. The  distribution  was  regarded  as  inadequate  by 
the  state  commissioner  of  education,  and  early  in  1921  a 
movement  for  a  distribution  of  an  additional  $3,000,000  of 
the  proceeds  of  the  income  tax  was  gathering  strength  in 
Massachusetts.  The  movement  was  opposed  by  residents 
of  Boston  on  the  ground  that  in  this  way  Boston  was  as- 
sessed for  the  benefit  oi  cities  and  towns  which  should  bear 
their  own  educational  burdens,  and  defended  by  educational 
officials  and  farming  interests,  who  urged  that  the  burdens 
of  the  schools  upon  the  cities  and  towns  should  be  equalized 
and  the  work  standardized.  The  difficulties  of  attaining 
fair  and  satisfactory  distribution  of  income  tax  funds  are 
brought  out  clearly  by  the  argument  in  Massachusetts.  In 
this  state,  as  elsewhere,  the  advantages  of  a  distribution  to 
the  localities  and  the  consequent  obviousness  of  the  lighten- 
ing of  the  tax  burden  seem  in  part  to  be  outweighed  by  the 
local  controversies  as  to  the  justice  with  which  the  dis- 
tributon  is  effected  in  practice. 

The  elasticity  of  the  income  tax  is  recognized  in  Massa- 
chusetts as  it  is  in  Wisconsin.  The  legislature  of  1919 
turned  to  it  for  resources  with  which  to  meet  a  temporary 
financial  emergency, — the  obligations  assumed  by  the  com- 
monwealth towards  ex-soldiers — and  increased  the  rate  on 


77]  THE  MASSACHUSETTS  INCOME  TAX  77 

business  incomes  by  one  per  cent,  and  the  rate  on  income 
from  intangibles  by  one  and  one-half  per  cent,  as  noted 
above.  The  legislature  of  the  previous  year  had  ordered 
an  increase  of  10  per  cent  of  the  taxes  paid  for  the  year, 
thus  increasing  the  yield  by  $i,237,o57.1  These  experi- 
ments are  not  as  radical  as  those  made  by  Wisconsin,  which 
doubled  the  greater  part  of  the  scale  of  rates,  but  they  are 
important  enough  to  render  the  tax  unnecessarily  unpopu- 
lar. The  purpose  of  an  addition  to  an  existing  tax  is 
readily  lost  sight  of,  and  the  tax  appears  unduly  burden- 
some; while  a  special  tax  imposed  for  such  a  purpose  as| 
that  of  raising  funds  to  pay  a  soldier's  bonus  operates  to 
keep  the  particular  emergency  clearly  in  mind.  Changes  in 
the  rate  of  the  income  tax  in  order  to  make  the  final  adjust- 
ment between  estimates  of  expenses  and  receipts  ordinarily 
arise  from  a  situation  of  another  kind,2  and  might  prove 
more  satisfactory.  Such  a  policy  has  been  used  in  Great 
Britain  in  determining  the  rates  of  the  income  tax,  and 
might,  with  a  satisfactory  budget  system,  prove  feasible  in 
this  country. 

2.  Financial  results  in  Massachusetts 

The  income  tax  in  Massachusetts  has  been  a  conspicu- 
ous success  from  a  financial  point  of  view.  The  rates  are 
moderate,  except  for  the  income  from  intangibles,  and  they 
include  no  progressive  feature;  but  the  administration  iai 
centralized,  like  that  of  Wisconsin,  and  efficiency  in  collect- 
ing the  tax  was  therefore  to  be  expected  from  the  begin- 
ning. Moreover,  the  annual  flow  of  wealth  in  Massachu- 

1  Massachusetts  Tax  Commissioner,  Report,  1918,  p.  32. 

3  Lutz,  in  a  Report  on  the  Operation  of  State  Income  Taxes,  pre- 
sented to  the  Ohio  Special  Joint  Taxation  Committee,  September  18, 
1919,  p.  102,  of  the  Taxation  Committee's  report,  suggests  that  the 
Massachusetts  experiments  prove  the  feasibility  of  a  flexible  adjustment 
of  this  kind. 


78          STATE  TAXATION  OF  PERSONAL  INCOMES          [78 

setts  is  great.  Massachusetts  ranks  as  the  fourth  state  in 
the  order  of  the  amount  of  personal  income  taxes  paid  to* 
the  federal  government,  and  is  outranked  only  by  New 
York,  Pennsylvania,  and  Illinois.1  A  carefully  devised 
tax  law,  efficiently  administered,  should  therefore  be  a 
productive  and  reliable  revenue  measure. 

The  income  taxes  collected  in  Massachusetts  stand  asi 
follows  for  the  first  four  years  of  the  operation  of  the 
law:2 

Year  of  collection  Amount  Amount 

(on  incomes  of  previous  year)  collected          distributed 

1917    $12,535,630          $12,207,769 

1918    14,882,545  14,463,644 

1919 15,646,872  15,019,937 

1920 16,233,544  15,230,712 

Owing  to  the  fact  that  almost  all  of  the  proceeds  of  the 
Massachusetts  tax  are  distributed  to  the  local  units,  the 
fraction  which  they  form  of  the  total  state  tax  receipts 
has  no  particular  significance.  An  idea  of  the  remarkable 
success  O'f  the  Massachusetts  income  tax  may  be  gained, 
however,  by  noting  the  fact  that  if  income  tax  receipts  were 
added  to  the  total  state  tax  receipts,  the  income  tax  receipts5 
would  form  roughly  one-third  of  the  whole  sum. 

The  Massachusetts  tax  is  preeminently  successful  when 
judged  by  a  second  standard.  The  federal  taxes  on  per- 
sonal incomes  collected  in  Massachusetts  in  1918  were 
$8)i,3O7,34O.31  'Massachusets  is  obtaining  from  one-fifth} 
to  one-sixth  as  much  from  the  state  income  tax  as  the 
federal  government  is  obtaining,  thus  outranking  even  Wis- 
consin. 

1  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 
1  Massachusetts  Commissioner  of  Corporations  and  Taxation,  Report 
for  1920,  p.  19. 
8  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 


79]  THE  MASSACHUSETTS  INCOME  TAX  79 

The  cost  of  collection  in  Massachusetts  is  remarkably 
low.  It  is  reported  as  follows:1 

Year  Cost  of  collection 

(Per  cent  of  total  assessment) 

1917  1.86 

1918  1.44 

1919  2.00 

1920  1.80 

The  rise  in  the  cost  for  1919  is  partly  accounted  for  by 
the  occupation  of  new  premises. 

An  analysis  of  the  returns  for  1920  shows  that  the 
greater  part  of  the  revenue  is  furnished  by  the  tax  on  in-* 
tangibles.  The  proportions  furnished  from  the  various 
sources  are  as  follows : 2 

Per  cent  of  total  tax 

Source  (including  additional 

i  and  l/2  per  cent) 

Business  income 40.69 

Annuities   14 

Gains    5.66 

Intercut  and  dividends 53.51 

3.  The  success  of  the  income  tax 

The  Massachusetts  income  tax  has  proved  to  be  more 
productive  and  less  disturbing  to  individual  taxpayers  than 
even  its  advocates  expected.  The  yield  has  more  than 
justified  the  anticipations  oi  those  who  prophesied  large 
additions  to  the  tax  revenues  from  this  source.  The  tax  is 
elastic,  as  is  shown  by  the  large  income  promptly  obtained 
from  the  special  "  war  taxes "  and  from  the  temporary 
taxes  added  soon  afterwards.  Its  cost  of  collection  is  low. 

1  Massachusetts  Tax  Commissioner,  Report,  1917,  p.  15;  1918,  p.  27; 
1919,  p.  40;  1920,  p.  16. 

'Massachusetts  Commissioner  of  Corporations  and  Taxation,  Report 
for  1920,  p.  15. 


go          STATE  TAXATION  OF  PERSONAL  INCOMES          [80 

The  tax  has  produced  a  more  equitable  system  by  increas- 
ing the  revenue  from  intangibles.  It  has  effected  a  better 
distribution  of  the  tax  burden  among  the  various  com- 
munities of  the  state.  The  tax  commissioner  in  1917  em- 
phasized the  improvement  in  bookkeeping  by  individuals 
and  associations  engaged  in  business,  and  noted  a  slighter 
tendency  than  that  which  existed  before  the  passage  of  the 
act  for  individuals  to  leave  the  state  in  order  to  escape  tax- 
ation. A  consideration  which  is  fully  as  important  as  any 
of  these  is  to  be  found  (in  the  state  of  public  opinion,)  in  the 
general  impression  that  taxation  in  the  state  is  less  unjust 
and  unequal  than  previously.1 

There  is  a  general  feeling  of  satisfaction  by  the  change  to  an 
income  tax  which  we  find  expressed  by  all  classes  of  people.  The 
wealthier  class,  in  most  cases,  are  paying  more  than  in  the  past ; 
many  who  never  paid  in  previous  years  are  now  bearing  their 
share  of  the  tax  burden ;  and  many  of  small  means,  by  the  exemp- 
tion provided  by  the  act,  are  now  given  proper  relief. 

The  tax  commissioner  in  1919  again  noted  an  improve- 
ment in  bookkeeping  methods  throughout  the  state.  The 
improvement  has  been  noticeable  in  each  year,  as  modern 
bookkeeping  and  accounting  systems  are  installed  as  a 
result  of  the  division  audits.  The  steady  improvement 
not  only  facilitates  the  assessment  and  collection  of  the 
income  tax,  but  has  an  effect  upon  the  conduct  of  business 
generally.  One  of  the  necessary  results  is  the  elimination 
of  the  majority  of  the  bankruptcy  cases  which  are  to  be 
traced  to  an  ignorance  of  the  internal  affairs  of  the  business. 

With  regard  to  the  general  opinion  as  to  the  justice  of 
taxing  incomes,  the  commissioner  reported  in  1919  as  fol- 
lows : 2 


1  Massachusetts  Tax  Commissioner,  Report,  1917,  p.  19. 

2  Report,  1919,  pp.  42,  43- 


THE  MASSACHUSETTS  INCOME  TAX  gl 

There  seems  to  be  no  abatement  of  the  general  satisfaction  with 
this  method  of  taxation,  not  a  single  taxpayer  having  been  met 
with  who  wishes  to  return  to  the  general  property  tax  system. 
The  burden  of  governmental  maintenance  is  more  equitably  dis- 
tributed than  ever  before.  There  is  a  noticeable  reaction  from 
abnormal  centralization  of  wealth  in  favored  localities — a  condi- 
tion alarmingly  prevalent  before  the  Income  Tax  Law  came  into 
operation. 

After  having  observed  the  effects  of  the  increased  rates 
voted  in  1919  for  the  purpose  of  raising  funds  for  a 
soldiers'  bonus,  the  tax  commissioner  gave  warning  against 
the  further  extension  of  the  rates.  In  his  opinion  ad- 
ditional increases  in  the  rates  would  inevitably  result  in  loss 
of  revenue  through  the  disturbing  effect  on  the  investor. 
In  the  course  of  the  year  (1919)  several  cases  of  change 
of  domicile  had  occurred,  in  sufficiently  important  instances1 
to  have  come  to  the  attention  of  the  income  tax  divisions, 
which  had  been  attributed  to  the  constantly  increasing 
rates.  At  the  close  of  the  year  the  situation  did  not  appear 
serious,  but  it  gave  a  significant  warning  for  the  future. 

The  classification  of  the  various  kinds  of  income,  a  mat- 
ter which  seemed  very  simple  when  the  income  tax  law  was 
devised,  is  now  proving  troublesome.  The  tax  commis- 
sioner comments  on  this  situation  as  follows :  x 

Possibly  the  one  criticism  of  our  income  tax  system  which  can  be 
made  with  some  semblance  of  justification  lies  in  the  complica- 
tions incident  to  the  various  classifications  of  taxable  and  exempt 
income.  While,  fundamentally,  these  classifications,  or  most  of 
them,  rest  upon  perfectly  sound  foundations,  yet  it  is  still  an  un- 
deniable fact  that  the  complexities  incident  to  the  four  classifica- 
tions as  established  are  somewhat  of  a  handicap  both  to  the  ad- 
ministration of  the  law  and  to  the  tax-paying  public,  who  find  it 
quite  difficult  properly  to  allocate  the  various  kinds  of  income  in 
their  returns.  In  the  course  of  approximately  8,000  verifications 

1  Report,  1919,  pp.  13,  14. 


82         STATE  TAXATION  OF  PERSONAL  INCOMES          [82 

of  returns  made  within  the  past  two  years,  nearly  half  that  num- 
ber were  found  to  be  in  error,  either  in  favor  of  or  against  the 
interests  of  the  taxpayer. 

The  first  step  towards  simplifying  the  classification  is  sug- 
gested by  the  tax  commissioner  as  that  of  abolishing  the 
group  of  "  net  gains  from  dealing  in  intangibles,"  taxed  at 
three  per  cent,  and  including  this  income  in  the  business 
classification.  This  part  of  the  tax  formed  only  1.38  per 
cent  of  the  total  taxes  on  income  returned  in  1919,  while 
business  income  formed  35.03  per  cent  of  the  total,  and  its 
inclusion  with  the  latter  tax  seems  a  simplification  through 
which  little  administrative  or  financial  value  would  be  lost. 

The  Massachusetts  law  provides  for  the  exemptions  for 
minor  children  only  up  to  the  age  of  18.  This  age  is  be-* 
low  that  at  which  young  persons  in  the  colleges  and  univer- 
sities can  'become  self-supporting,  and  frequent  complaints- 
as  to  its  injustice  are  heard : x 

Is  the  present  age  limit  a  just  and  fair  one  to  the  average  tax- 
payer? When  it  is  considered  that  as  time  goes  on  more  and 
more  of  our  young  men  and  women  are  seeking  higher  education, 
not  alone  from  the  homes  of  the  wealthy  but  from  the  homes  of 
mechanics  and  the  great  middle  classes  (so  called)  as  well  as 
those  of  moderately  circumstanced  merchants  and  relatively  low- 
salaried  professional  men ;  when  it  is  realized  that  many  a  parent 
of  moderate  though  taxable  income  is  financing  one  or  more  boys 
or  girls  through  a  college  course;  and,  particularly,  when  it  is 
acknowledged  that  between  the  ages  of  eighteen  and  twenty-one 
years  the  expense  of  maintenance  of  dependent  children,  especially 
the  child  in  college,  is  more  than  double  the  expense  of  any  prior 
year, — there  seems  to  be  much  equity  in  the  frequent  complaint 
that  the  age-limit  of  eighteen  years  is  too  low  and  that  this  limit 
may  well  be  raised  to  twenty- one  years,  the  legal  and  generally 
recognized  age  of  independence. 

In  addition  to  changes  in  the  classification  of  incomes, 
1  Report,  1919,  p.  15. 


83]  THE  MASSACHUSETTS  INCOME  TAX  83 

and  an  extension  of  the  age  of  dependent  children  for 
which  an  exemption  is  allowed,  the  Massachusetts  authori- 
ties are  urging  reforms  which  will  effect  the  personnel  of 
the  income  tax  administration.  It  is  urged  that  the  Massa- 
chusetts employees  should  be  placed  under  a  suitable  comr 
petitive  civil-service  rating,  and  that  the  salaries  offered 
should  be  made  more  nearly  commensurate  with  those  of- 
fered for  similar  degrees  of  ability  in  private  enterprises. 

4.  Present  income  tax  problems  in  Massachusetts 

If  it  is  carefully  handled  and  if  the  legislature  refrains 
from  tampering  with  it  on  occasions  of  temporary  financial 
pressure,  the  Massachusetts  income  tax  will  probably  prove 
to  -be  a  stable,  reliable,  and  productive  source  of  revenue,, 
collected  with  as  little  dissatisfaction  as  any  tax  is  likely  to 
be  collected  with.  The  dangers  of  utilizing  the  income  tax 
to  meet  sudden  financial  emergencies  have  already  been  dis- 
cussed. The  reports  of  the  Massachusetts  tax  commis- 
sioner indicate  that  in  some  quarters  at  least  they  are  real- 
ized in  Massachusetts,  and  it  is  probable  that  after  the 
period  of  collecting  the  funds  for  soldier's  bonuses  has! 
passed  the  state  will  not  again  rely  upon  such  extensions  of 
the  tax,  at  least  for  some  time  to  come. 

As  far  as  the  form  of  the  law  is  concerned,  the  chief 
differences  of  the  Massachusetts  income  tax  law  from  the 
income  tax  laws  of  the  two  other  states  which  are  most  im- 
portant in  this  field,  Wisconsin  and  New  York,  are  those 
of  its  selection  of  four  types  of  income  for  taxation  and 
of  the  imposition  of  a  proportional  rate.  It  is  inevitable 
that  a  change  of  plan  in  Massachusetts  should  come  up  for 
discussion  soon,  particularly  if  the  New  York  law  proves 
to  work  smoothly.  The  actual  effect  of  the  Massachusetts 
plan  is  that  of  differentiating  four  different  kinds  of  per- 
sonal income,  imposing  different  rates  upon  the  different 


84         STATE  TAXATION  OF  PERSONAL  INCOMES          [84 

classes,  and  so  fixing  these  rates  that  investment  or  "  un- 
earned "  income  is  taxed  at  an  unusually  high  rate,  propor- 
tional in  character.  The  proportional  rate  itself  is  protn 
ably  not  one  of  the  most  serious  parts  of  the  problem.  The 
best  of  modern  expert  tax  opinion  is  in  favor  of  state  in- 
come tax  rates  which,  if  progressive,  reach  only  a  low 
maximum;  and  it  is  an  open  question  whether  the  argu- 
ments for  such  a  scale,  such  as  the  one-two-three-per  cent 
scale  employed  in  New  York,  are  more  convincing  than  the 
arguments  for  a  simple  proportional  tax,  possibly  a  two! 
per  cent  tax,  upon  personal  incomes.  With  the  federal  in- 
come tax  scale  as  an  ever-present  background  for  the  state 
taxes  on  personal  incomes,  the  scope  o£  the  state  rates  must 
always  be  limited.  Differentiation  of  types  of  income  is  a 
more  involved  problem.  A  plan  of  differentiation  adopted 
later  than  the  Massachusetts  plan,  that  of  North  Dakota's! 
income  tax  system  of  1919,  proved  to  be  unworkablej 
Meanwhile  Massachusetts,  a  much  richer  state,  found  this 
sources  of  income  the  most  productive  of  the  four  sources) 
tapped  by  the  income  tax  act,  and  relied  upon  it  for  more 
than  one-half  of  the  state  income  tax  receipts.  Surpris- 
ingly, this  heavy  tax  upon  funded  incomes  failed  to  arouse 
any  unusual  dissatisfaction.  With  the  development  of  the 
personal  income  tax  in  the  adjacent  state  of  New  York, 
and  the  imposition  of  a  more  moderate  rate  upon  invest- 
ment income,  this  state  of  affairs  in  Massachusetts  may  be- 
come less  placid. 

Another  unusual  factor  in  Massachusetts  is  the  exemp- 
tion from  taxation  under  the  personal  income  tax  of  in- 
come from  real  estate.  Historically  this  is  easily  explic- 
able, and  the  traditional  aversion  to  taxing  both  income  and 
the  source  from  which  it  is  derived  is  well  known.  In  the 
course  of  the  present  period  of  development  of  state  in- 
come taxes,  however,  there  has  come  to  be  less  and  less  dis- 


85]  THE  MASSACHUSETTS  INCOME  TAX  85 

cussion  of  means  in  which  double  taxation  of  this  kind  may 
be  avoided,  and  more  of  an  effort  to  devise  simple  plans  by 
which  tax  burdens  may  be  adjusted  equitably  among  the 
individuals  affected.  The  exemption  of  the  income  from 
investment  in  Massachusetts  corporations  is  another  illus- 
tration of  the  complicated  arrangement  into  which  Massa- 
chusetts entered,  working  under  the  older  idea  that  double 
taxation  of  income  must  be  avoided  at  any  cost.  The  ex- 
tension of  the  Massachusetts  taxes  on  occupational  income 
and  on  investments  to  income  from  whatever  source  and 
wherever  derived  would  simplify  the  law,  diminish  popular 
confusion  as  to  the  reasons  for  the  various  exemptions,  and 
(if  accompanied  by  a  corresponding  reduction  in  the  rate 
of  tax  on  investment  income)  results  simply  in  heavier  tax- 
ation of  the  sources  from  which  funded  incomes  are  de- 
rived. 


CHAPTER  V 
INCOME  TAXES  IN  MISSOURI  AND  DELAWARE 

i .  The  Missouri  income  tax 

IN  i  (}i  7,  the  year  following  the  passage  of  the  new  Mas- 
sachusetts law,  the  states  of  Missouri  and  Delaware,  both 
relatively  inexperienced  in  this  form  of  taxation,  under^ 
took  to  tax  personal  incomes. 

Missouri  had  had  an  income  tax  of  short  duration  as  a 
Civil  War  measure,  but  had  given  it  up  almost  immediately 
after  the  close  of  the  war,  and  had  tried  no  tax  of  the  kind 
since  that  time.  The  law  passed  in  1917  therefore  marked 
a  new  and  important  step  in  the  fiscal  history  of  the  state.1 

The  new  law  imposed  a  tax  of  one-half  of  one  per  cent 
on  incomes  from  all  sources  derived  within  the  state.  It 
applied  to  individuals  and  corporations.  Incomes  of  single 
persons  to  the  amount  of  $3,000  and  of  heads  of  families 
to  the  amount  of  $4,000  were  exempt.  Deductions  for 
business  expenses,  interest,  taxes,  losses,  bad  debts,  and 
depreciation  were  permitted.  Receipts  for  state  taxes  on 
property  were  acceptable  in  payment  of  income  taxes.  The 
State  auditor  was  given  supervision  of  the  tax,  and  the 
regular  assessors  and  collectors  of  the  counties  became  also 
assessors  and  collectors  of  the  income  tax.  The  proceeds 
apparently  were  intended  to  go  to  the  state.  This  tax  was 
first  collected  in  1918,  on  incomes  received  in  the  latter  half 

1  Laws  of  Missouri,  1917,  pp.  524-538. 
86  [86 


87]       INCOME  TAXES  IN  MISSOURI  AND  DELAWARE       87 

of  1917.  In  the  same  year  the  law  was  declared  constitu- 
tional by  the  Missouri  Supreme  Court.1 

An  income  tax  on  this  modest  scale  was  inadequate  for 
the  financial  needs  of  the  state,  a  fact  which  was  recognized 
by  the  legislators  of  the  following  year.  In  1919  a  consis- 
tent attempt  was  made  to  increase  the  state  revenue  from 
various  sources.  The  income  tax  law  was  amended,  and 
the  rate  increased  from  one-half  of  one  per  cent  to  one  and 
one-half  per  cent.2  The  exemptions  were  reduced  from 
$4,000  for  heads  of  families  and  $3,000  for  others  to( 
$2,000  and  $1,000  respectively.  Provision  was  made  for 
an  additional  exemption  of  $200  for  each  dependent  child. 
An  important  change  was  contained  in  the  repeal  of  the 
section  of  the  law  of  1917  which  permitted  the  presenta- 
tion of  receipts  for  state  property  taxes  in  payment  of  in- 
come taxes.  As  a  result  the  Missouri  income  tax  became 
an  addition  to  the  tax  system  of  the  state  rather  than  a 
substitute  for  the  property  tax.  In  1921  the  rate  was  re- 
duced to  one  per  cent. 

The  amounts  collected  on  incomes  are  as  follows : 3 

Year  of  collection  Amount  collected 

1918  \  .  $686,785 

1919} 

1920    2,762,171 

The  tax  collected  in  1920  had  'been  expected  to  yield 
nearly  double  the  amount  recorded,  as  the  total  amount  of 
taxes  charged  under  the  assessment  was  $4,623,374.  The 
diminished  collections  were  caused  by  a  decision  of  the 
Supreme  Court  sustaining  the  contention  that  the  increased 
taxes  must  be  paid  only  on  the  income  of  that  part  of  the 

1  Glasgow  vs.  Rowse,  43  Mo.  1.  c,  489,  490,  491. 

*  Laws  of  Missouri,  1919,  Act  of  .May  6th. 

s  Missouri  State  Auditor,  Statements,  March  19,  1920,  Dec.  21,  1920. 


88         STATE  TAXATION  OF  PERSONAL  INCOMES          [88 

year  succeeding  the  passage  of  the  new  (1919)  law.  The 
incomes  of  1920  are  expected  to  yield  from  $4,000,000  to 
$4,500,000  in  income  taxes. 

The  assessments  of  individuals  on  1919  incomes  formed 
almost  one-half  of  the  total  assessment.  On  the  asump- 
tion  that  collections  are  divided  in  the  same  way,  individual 
incomes  contributed  $1,203,000,  or  about  one-seventeenth 
of  the  amount  collected  by  the  federal  government  on  1918 
incomes. 

The  receipts  from  the  income  tax  for  the  year  1918 
formed  slightly  more  than  eight  per  cent  of  the  total  tax 
receipts  of  the  state.  For  the  year  1919  the  income  tax1 
receipts  formed  twenty-six  per  cent  of  the  total  tax  re- 
ceipts.1 The  costs  are  not  separated  from  those  for  mak- 
ing the  general  assessment  of  property. 

In  spite  of  the  efforts  of  the  legislature  of  1919  to  re- 
form the  law,  it  remains  inadequate.  'An  act  which  im- 
poses so  low  a  rate,  lacks  the  feature  of  graduation,  and 
provides  for  no  separate  central  or  local  administration,  has 
not  reached  its  maximum  of  productiveness.  Comparisons 
with  the  Wisconsin  income  tax  are  hardly  valid,  however; 
for  although  Missouri  is  the  richer  state,  as  the  returns  to 
the  federal  government  for  the  personal  net  incomes  of  the 
last  three  years  show,2  its  governmental  expenses  are  con- 
siderably less,8  and  it  is  unnecessary  to  attempt  to  raise  as- 
large  amounts  by  taxation.  Moreover,  the  number  of  in- 
dividual returns  in  Missouri  in  1919  (95,956)  *  is  not  far 

1  United  States  Bureau  of  the  Census,  Financial  Statistics  of  States, 
1918,  p.  7°;  1919,  P.  64. 

•United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  pp. 
32,  33- 

*  United  States  Bureau  of  the  Census,  Financial  Statistics  of  States, 
1918,  p.  80;  1919,  p.  74. 

4  Missouri  State  Auditor,  Statement,  Dec.  21,  1920. 


89]       INCOME  TAXES  IN  MISSOURI  AND  DELAWARE       89 

behind  the  federal  government's  number  from  Missouri  for 
1918,  (110,890)  when  the  personal  exemptions  stood  at 
the  same  figures.  As  Missouri's  governmental  expenses 
rise,  it  may  be  necessary  to  revise  the  law  along  the  lines  of 
the  Wisconsin  legislation. 

2.  The  Delaware  income  tax 

Before  1917  Delaware  had  levied  taxes  for  only  two 
brief  periods.  A  faculty  tax  was  adopted  in  1796,  to  be 
assessed  proportionately  to  the  "  gains  and  profits "  of 
merchants,  tradesmen,  mechanics,  and  manufacturers,  but  it 
soon  feel  into  disuse.  Just  after  the  close  of  the  Civil 
war  a  tax  was  imposed  on  salaries  and  fees,  but  it  was  suc- 
ceeded by  a  license  tax  in  iS/i.1 

The  personal  income  tax  law  passed  in  Delaware  in  1917 
was  more  promising  than  that  of  Missouri,  passed  in  the 
same  year,  in  that  it  imposed  a  higher  rate  (one  per  cent) 
and  allowed  smaller  deductions.2  On  the  other  hand,  the 
tax  was  not  applied  to  corporations  or  to  non-residents. 
Persons  with  incomes  of  not  more  than  $1,000  were  ex- 
empt. Business  expenses,  interest  on  indebtedness,  taxes, 
losses,  bad  debts,  and  depreciation  allowances  were  to  be 
deducted.  A  striking  feature  was  the  exclusion  of  gains 
from  agricultural  operations.  The  state  treasurer,  as- 
sisted by  an  income  tax  clerk  and  a  special  collector  of 
state  revenue,  was  charged  with  the  administration  of  the 
law.  It  was  assumed  that  the  state  treasury  was  to  receive 
the  proceeds  of  the  tax. 

In  1919  the  law  received  important  amendments.5 
Agricultural  gains  were  brought  under  the  law.  The  per- 
sonal exemptions  were  changed  to  correspond  with  those 

1  Seligman,  op.  cit.,  pp.  378,  379;  Kennan,  op.  cit.,  p.  212. 
*  Laws  of  Delaware,  1917,  ch.  26. 
3  Laws  of  Delaware,  1919,  ch.  30. 


90         STATE  TAXATION  OF  PERSONAL  INCOMES          [90 

permitted  under  the  federal  law.  Two  special  collectors 
of  state  revenue  were  authorized  instead  of  one,  and  these 
collectors  were  given  more  extensive  power  and  authority 
over  the  methods  of  collecting  the  income  tax.  Proposals 
for  further  amendments  along  the  lines  of  the  model  in- 
come tax  law  were  placed  before  the  legislature  of  1921. 

The  Delaware  law  has  been  attacked  on  the  ground  that 
it  is  in  violation  of  provisions  of  both  federal  and  state 
constitutions,  but  it  has  successfully  withstood  the  attacks.1 

The  yield  of  the  Delaware  income  tax  stands  as  follows 
for  the  first  two  years : fl 

Year  of  collection  Yield 

1918    $400,000 

IQI9 317,004 

The  proceeds  of  the  income  tax  in  Delaware  are  treated 
as  an  addition  to  the  total  revenue  rather  than  as  a  substi- 
tute for  the  revenues  formerly  derived  from  unsatisfac- 
tory tax  measures,  as  has  been  so  often  the  case  in  other 
states.  The  greater  part  of  the  revenue,  $250,000,  in  each 
year  has  been  placed  to  the  credit  of  the  school  fund.  The 
balance  is  transferred  to  the  state  highway  department. 
The  sums  available  in  each  year  have  enabled  the  schools  ta 
have  a  decided  increase  and  have  greatly  facilitated  the 
work  of  the  state  highway  department. 

Only  that  part  of  the  proceeds  which  are  transferred  to 
the  state  highway  department  appear  as  receipts  included 
in  the  general  fund  of  the  state.  If  that  part  which  is 
assigned  to  the  state  school  department  is  added,  the  share 
of  the  income  tax  in  the  receipts  of  the  state  treasurer  for 
the  two  years  is  as  follows : 

1  Bulletin  of  the  National  Tax  Association,  vol.  v,  no.  3  (Dec.,  1919), 
pp.  86,  87. 
'Delaware  State  Treasurer,  Report,  1918,  p.  6;  Report,  1919,  p.  6. 


gi  ]       INCOME  TAXES  IN  MISSOURI  AND  DELAWARE       gi 

Cash  receipts  of  the  Income  tax  receipts 

Year  of  collection  general  fund  (per  cent  of 

plus  income  taxes'1  total  receipts) 

1918   $1,678,849  23.8 

1919   3,509,722  9-0 

The  tax  collected  on  incomes  received  in  1918  was  about 
one-twenty-third  of  the  amount  collected  by  the  federal 
government  on  personal  incomes  in  Delaware  for  that 
year.3  The  cost  of  collection  for  the  state  government  was 
about  three  per  cent. 

The  system  of  distribution  adopted  in  Delaware  has  been 
commended  as  one  which  has  the  advantages  of  reason- 
ableness, popularity,  and  attractiveness  to  the  general 
public.8  The  use  of  the  whole  or  a  major  part  of  the 
proceeds  of  the  state  income  tax  for  educational  purposes 
readily  absorbs  the  yield  of  the  income  tax.  A  measure 
for  the  distribution  is  available  in  the  school  enrollment, 
and  the  definite  reflection  in  the  individual's  tax  bill  of  a 
reduction  in  the  largest  item  is  calculated  to  affect  the  tax- 
payer's attitude  towards  the  tax. 

In  Delaware  the  distribution  of  the  amount  of  $250,00x5 
which  is  annually  set  aside  for  the  use  of  the  schools  isl 
made  as  state  aid  to  elementary  schools.  The  funds  are 
distributed  by  the  trustee  of  the  school  fund  upon  certificate 
of  the  state  board  of  education.  The  schools  which  con- 
form to  the  regulations  of  the  board  of  education  are  certi- 
fied by  districts,  and  the  trustee  of  the  school  fund  ap- 
portions the  amount  available  to  the  various  districts  on 
the  basis  of  the  total  elementary  school  enrollment  during 

1  Delaware  State  Treasurer,  Report,  1918,  p.  5 ;  1919,  p.  5. 

*  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 

3  A.  E.  Hokomb,  "  State  Income  Taxes  .  .  .  Methods  Employed  in 
Delaware,"  Bulletin  of  the  National  Tax  Association,  vol.  vi,  no.  4 
{Jan.  1921),  pp.  126-128. 


g2         STATE  TAXATION  OF  PERSONAL  INCOMES          [92 

the  preceding  year.  The  enrollment  of  high  schools  is 
left  out  of  account. 

A  chapter  of  local  political  history  has  an  unforeseen  ef- 
fect upon  the  distribution  of  the  income  tax  to  the  schools.1 
The  city  of  Wilmington,  which  elected  not  to  come  under 
the  new  school  code  adopted  in  1917,  is  thereby  excluded 
from  the  districts  which  receive  state  aid,  although  the 
city  contributes  95  per  cent  of  the  income  taxes  collected. 

Neither  the  decreased  collections  from  the  state  income 
tax  in  the  second  year  of  its  operation  nor  the  small  ratio 
which  the  state  receipts  from  the  tax  bear  to  the  federal 
collections  appear  to  be  considered  grounds  for  expanding 
the  scope  of  the  state  income  tax.  From  the  beginning  the 
tax  has  been  treated  as  a  means  a  meant  of  supplementing 
the  state  revenues  with  a  high  degree  of  facility.  The 
yield  of  the  first  year  established  the  fact  that  the  tax  was 
adequate  for  the  purposes  for  which  it  was  used,  and  the 
changes  made  subsequently  were  for  the  purpose  of  render- 
ing the  act  more  equitable  in  its  operation  rather  than  with 
a  view  of  expanding  the  revenue  from  that  source. 

1  Holcomb,  op.  cit.,  p.  127. 


CHAPTER  VI 

INCOME  TAXES  IN  VIRGINIA,  SOUTH  CAROLINA,  AND 
NORTH  CAROLINA 

i.  History  of  the  Virginia  income  tax 

THE  income  tax  law  of  Virginia,  which  has  been  revised 
by  nearly  every  legislature  of  recent  years,  was  given  the 
principal  outlines  of  its  present  form  in  I9I8.1  Virginia 
had  made  use  of  the  income  tax  in  one  or  another  of  its 
various  forms  for  a  longer  period  than  any  other  state  in 
which  the  tax  is  now  in  force,  with  the  single  exception  of 
Massachusetts.  Up  to  1911  Virginia  was  regarded  as  ex- 
ceptionally successful  in  its  use  of  this  source  of  revenue, 
in  that  the  annual  proceeds  had  come  to  exceed  $100,000. 
The  recent  revisions  in  Virginia,  with  the  exception  of  the 
inclusion  of  corporations  in  1916,  have  failed  to  make  es- 
sential changes  in  the  law  or  to  bring  it  in  line  with  the  in- 
come taxes  of  the  last  decade  which  are  so  framed  as  to 
produce  revenues  running  into  the  millions. 

Virginia  maintained  the  early  faculty  taxes  for  only  a 
brief  period  (1777-1782;  1786-1 790)  .2  The  real  begin- 
ning of  income  taxation  in  the  state  is  to  be  found  in  1843. 
Since  that  year  an  income  tax  law  has  remained  continu- 
ously on  the  statute  books.  The  law  of  1843  ^d-  a  t3^ 
upon  salaries  and  professional  incomes.  It  was  several 

1  Laws  of  Virginia,  1918,  ch.  219. 

2D.  O.  Kinsman,  The  Income  Tax  in  the  Commonwealths  of  the 
United  States  (New  York,  1903),  pp.  13,  14. 

93]  93 


94         STATE  TAXATION  OF  PERSONAL  INCOMES          [94 

times  modified,  but  it  underwent  no  radical  revision  until 
the  Civil  War  period,  when  thes  rates  were  increased  and 
the  classifications  changed.  After  the  close  of  the  Civil 
War  the  rates  were  greatly  reduced.  In  1874  the  rate  was 
fixed  at  one  per  cent,  at  which  point  it  remained,  up  to  1919, 
and  the  exemption  at  $600,  where  it  remained  until  1908 
when  it  was  raised  to  $i,ooo.1  In  1910  the  exemption  was 
raised  to  $2,000,  and  in  1916  lowered  to  $1,200.  In  1916 
the  law  was  extended  to  include  the  income  of  corporations.2 
In  1919  the  rate  for  incomes  in  excess  of  $3,000  was  made 
two  per  cent.3 

According  to  the  law  now  in  force  *  a  tax  of  one  per  cent 
is  imposed  on  the  income  of  every  person  or  corporation 
residing  or  doing  'business  in  Virginia  up  to  $3,000,  and 
two  per  cent  on  income  in  excess  of  that  amount.  The 
customary  deductions  are  provided  for.  The  exemptions 
stand  at  $1,200  for  the  individual  income,  $1,800  for  hus- 
band and  wife  together,  and  $200  for  each  person  entirely 
dependent  and  actually  supported  by  the  taxpayer.  The 
administration  is  in  the  hands  of  the  auditor  of  public  ac- 
counts and  the  county  commissioners  of  the  revenue  .The 
receipts  are  applied  to  the  expenses  of  the  state  govern- 
ment. 

2.  The  yield  of  the  tax  in  Virginia 

Until  corporations  were  brought  under  the  tax  in  1916 
the  income  tax  in  Virginia  produced  only  a  small  amount 
of  revenue.  Beginning  in  that  year  the  receipts  have 

1  E.  Sydenstricker,  A  Brief  History  of  Taxation  in  Virginia  (Rich- 
mond, 1915),  P-  52. 
*  Laws  of  Virginia,  1916,  ch.  472. 
8  Laws  of  Virginia,  1919,  ch.  43. 
4  Laws  of  Virginia,  1918,  ch.  219,  as  amended. 


VIRGINIA,  SOUTH  CAROLINA,  NORTH  CAROLINA 


95 


greatly  increased.  A  summary  for  recent  years  is  as  fol- 
lows:1 

Year  of  collection  Receipts  from  income  taxes 

1908  ..................................  $122,058 

1909  ..................................   102,810 

1910  ..................................   106,909 

iQii  ......................  ............   129,429 

1912  ..................................   102,678 

1917  ..................................   353,756 

1918  ............  .  .....................   660,745 

1919  ..................................   906,733 

1920  ..................................  1,81  1,786 

The  cost  of  collection  ordinarily  constitutes  slightly  less 
than  four  per  cent  of  the  amount  collected. 

Although  Virginia  is  still  receiving  only  a  comparatively 
small  sum  from  the  income  tax  on  individuals  and  corpora- 
tions, the  state's  whole  scale  of  expenditure  is  lower  than 
that  of  the  other  states  previously  discussed,  with  the  ex- 
ception of  Delaware  and  Mississippi.*  In  1919  about  seven 
per  cent  of  the  total  treasury  receipts  were  made  up  of  in- 
come taxes.  This  percentage  was  expected  to  be  somewhat 
larger  for  the  fiscal  year  ending  September  30,  1920.  It 
is  not  possible  to  separate  personal  from  corporate  income 
taxes  in  the  Virginia  accounts,  so  that  the  exact  place  of 
the  personal  income  tax  in  the  Virginia  tax  system  cannot 
be  estimated. 

For  a  number  of  years  preceding  the  entrance  of  the 
United  States  into  the  war  and  the  consequent  readjust- 
ment of  financial  affairs,  public  as  well  as  private,  the  re- 
venue system  of  Virginia  was  considered  to  be  in  an  excep- 

1  Sydenstricker,  op.  cit.,  p.  53;  Virginia  Auditor  of  Public  Accounts, 
Report,  1919,  p.  6;  statements. 

*  United  States  Bureau  of  the  Census,  Financial  Statistics  of  States, 
P-  29. 


96         STATE  TAXATION  OF  PERSONAL  INCOMES          [96 

tionally  satisfactory  condition,  In  1917  the  auditor  of 
public  accounts  stated  that  in  his  opinion  the  financial  con- 
dition of  the  state  was  so  fortunate  that  the  rates  of  taxation 
on  intangible  personalty  could  be  reduced  and  the  taxes  on 
tangible  personalty  entirely  removed.1  These  recommen- 
dations were  made  solely  on  the  grounds  noted  above, 
namely  the  presence  of  a  surplus ;  for  the  usual  dissatisfac- 
tion with  the  operation  of  the  tax  on  intangibles  was  con- 
spicuously absent  in  Virginia  at  that  time. 

The  recommendations  for  reductions  in  the  rate  of  tax- 
ation were  not  followed,  and  the  situation  changed  sot 
rapidly  that  in  1919  it  was  decided  that  it  was  necessary  to 
extend  the  income  tax  for  the  purpose  of  raising  additional 
revenue.  Even  with  the  additional  rate  the  income  from 
the  tax  is  still  moderate.  It  should  be  borne  in  mind  in 
estimating  Virginia's  success  with  the  tax  that  the  financial 
needs  of  the  state  are  also  moderate.  On  the  whole  it 
umust  now  be  granted  that  Virginia  has  used  the  tax  satis- 
factorily, in  spite  of  the  absence  of  centralized  administra- 
tion and  other  modern  provisions. 

3.  The  repeal  of  the  South  Carolina  income  tax  law 

The  only  recent  example  of  the  failure  of  an  income  tax: 
law  in  such  a  way  that  the  abandonment  of  the  whole 
system  became  necessary  was  given  in  South  Carolina  in 
I9i8.2  In  so  far  as  the  failure  of  the  law  can  be  ascribed 
to  any  one  cause,  it  appears  to  lie  in  the  fact  that  the  ad- 
ministration was  left  in  the  hands  of  the  local  assessors, 
and  accordingly  the  law  was  never  fully  enforced. 

1  Virginia  Auditor  of  Public  Accounts,  Report,  1917,  pp.  xiii,  xiv. 

8  Laws  of  South  Carolina,  1918.  no.  433.  An  Act  to  Repeal  Sections 
354  and  360,  Inclusive,  of  the  Code  of  Laws  of  1912,  Volume  I,  Rela- 
tive to  Tax  on  Incomes  and  All  Acts  Amendatory  Thereof.  Approved 
Feb.  14,  1918. 


Q7]      VIRGINIA,  SOUTH  CAROLINA,  NORTH  CAROLINA      97 

The  forerunner  of  the  recent  income  tax  law  in  South 
Carolina  is  to  be  found  in  colonial  times.  A  law  imposing 
a  "faculty  tax,"  passed  in  1701,  continued  in  force,  with 
modifications,  until  the  Civil  War  brought  the  necessity  for 
additional  revenue.1  During  the  Civil  War  a  one  per 
cent  tax  was  laid  on  incomes  and  certain  profits,  but  thi^ 
method  of  taxation  proved  unpopular  and  soon  after  the 
war  it  was  abandoned.  The  revival  of  the  tax  occurred 
in  1897,  when  an  income  tax  on  a  progressive  scale  was  in- 
troduced.2 It  was  this  law  which  with  few  changes  re- 
mained in  operation  until  the  repeal  in  1918. 

The  tax  introduced  in  1897  was  a  general  income  tax, 
imposed  at  the  following  rates : 

Income  Rate  (per  cent) 

$2,500  tmt  less  than  $5,000 I 

5,000    "     "       "      7,500 il/2 

7,500      "        "          "       15,000 2 

15,000  and  over   3 

The  tax  applied  to  the  income  of  persons  living  outside 
the  state  who  owned  property  or  conducted  business  within 
the  state.  The  word  income  was  to  mean  "  gross  profits," 
and  from  this  amount  business  expenses  were  allowed  to  be 
deducted  in  computing  net  income.  The  tax  was  assessed 
and  collected  by  the  same  officials  and  at  the  same  time  aa 
other  taxes.  The  proceeds  of  the  tax  were  to  be  distributed 
among  the  counties  according  to  an  apportionment  made 
by  the  legislature. 

The  yield  of  the  tax  throughout  its  history  was  as  fol- 
lows : 3 

1  Seligman,  op.  cit.,  pp.  379,  398. 
'  Laws  of  South  Carolina,  1897,  ch.  22. 

3Kennan,  op.  cit.,  p.  230;  Seligman,  op.  cit.,  p.  417;  South  Carolina 
Tax  Commission,  Report,  1917,  p.  105. 


98         STATE  TAXATION  OF  PERSONAL  INCOMES          [98 

Year  Yield  of  income  tax 

1898 $689 

1899 4,829 

1900 975 

1901 609 

1902 292 

1903  1,476 

1904 1,281 

1905 2,130 

1906 12,201 

1007  10,687 

1908 8,431 

1909 16,236 

I9ii  14,387 

1913 17,400 

I9H  •• 15,303 

I9IS  31,126 

1916 27,690 

1917  34,050 

The  tax  officials  of  the  state,  realizing  the  impossibility  of 
enforcing  the  law,  have  argued  its  repeal  from  the  begin-* 
ning.  The  comptroller  general  repeatedly  described  the 
difficulties  of  enforcement  and  concurred  in  an  appeal  for 
the  abolition  of  the  law.1  The  state  tax  commission  from 
the  time  of  its  organization  expressed  great  dissatisfaction 
with  the  working  of  the  income  tax.2 

This  tax,  which  is  most  equitable  and  fair,  ...  is  unevenly  en- 
forced throughout  the  State.  In  some  counties  its  enforcement  is 
but  partial.  .  .  .  We  ask  the  members  and  other  taxpayers  to  ex- 
amine the  lists  in  their  own  counties,  and  note  the  absence  of 
names  of  those  whom  they  know  to  be  liable.  .  .  .  The  auditors 
refusing  to  enforce  the  law  should  be  removed  by  the  Governor. 

In  later  years  the  commission  became  even  more  explicit 
in  its  denunciation  of  continual  lack  of  enforcement/ 

1  Scligman,  op.  cit.,  p.  417. 

'South  Carolina  Tax  Commission,  First  Annual  Report,  1915,  p.  26. 

'  Report,  1916,  p.  20. 


99  ]      VIRGINIA,  SOUTH  CAROLINA,  NORTH  CAROLINA      gg 

In  some  counties  but  little  is  done  to  enforce  the  law,  notably  in 
Darlington,  Saluda,  and  Marlboro.  No  one  appears  to  pay  the 
tax  in  these  counties.  One  taxpayer  paid  in  Saluda  last  year  and 
he  quit  this  year. 

With  the  type  of  local  administration  referred  to  the 
failure  of  the  law  was  inevitable.  It  was  a  matter  of 
general  information  throughout  the  state,  almost  from  the 
beginning,  that  there  was  insufficient  provision  for  the  en- 
forcement of  the  law  with  the  result  that  a  few  persons 
paid  an  income  tax  while  the  vast  majority  escaped.  The 
repeal  of  the  law  in  1918  cleared  the  revenue  code  of  a 
tax  law  the  returns  of  which  in  recent  years  had  hardly 
paid  for  the  trouble  and  expense  of  collection,  and  which 
probably  had  a  demoralizing  effect  both  upon  the  taxpayers 
and  the  assessors. 

The  income  tax  in  South  Carolina  was  not  yet  dead,  how- 
ever. The  Special  Joint  Taxation  Committee  which  re- 
ported to  the  legislature  in  1921  devoted  a  considerable 
amount  of  attention  'to  the  inequitable  operation  of  the 
general  property  tax,  and  the  resulting  heavy  burdens  on 
the  farmer.  In  the  same  report  the  argument  that  taxation 
of  income  from  property  already  taxed  constitutes  double 
taxation  was  attacked.  The  Committee  stated  that  in  its 
opinion  the  state  taxation  of  incomes  relieves  property 
taxed  upon  an  ad  valorem  basis  from  a  part  of  the 
double  burden  of  state  and  local  taxation,  and  leaves  the 
major  part  of  the  property  tax  to  one  taxing  jurisdiction, 
that  of  the  locality.  This,  in  the  opinion  of  the  Committee, 
"  is  the  place,  object,  and  function  of  an  income  tax  in  a, 
system  of  state  taxation."  x  Although  an  income  tax  biU 
and  a  business  tax  bill  failed  of  passage  in  the  legislature 
of  1921,  the  determined  advocacy  of  an  income  tax  as  a 

1  Quoted  in  Bulletin  of  the  National  Tax  Association,  vol.  vi,  no.  6 
(March,  1921),  p.  180. 


I00       STATE  TAXATION  OF  PERSONAL  INCOMES 

source  of  state  revenue  indicates  that  the  tax  is  still  to  be 
heard  from  in  South  Carolina. 

4.     The  taxation  of  incomes  in  North  Carolina 

In  192'!  the  state  of  North  Carolina  completed  72  con- 
tinuous years  of  income  taxation,  and  demonstrated  its 
reliance  upon  this  form  of  tax  by  the  passage  of  a  new  law 
along  modern  lines. 

An  income  tax  was  first  introduced  in  North  Carolina 
in  1849,  when  a  three  per  cent  tax  was  laid  upon  profits! 
from  financial  dealings,  and  a  three-dollar  tax  upon  salaries 
and  fees.1  The  law  underwent  frequent  changes,  one  of 
the  most  important  of  which  was  an  extension  during  the 
Civil  War  period,  when  rates  were  increased  and  progres- 
sive scales  introduced.  In  1870  the  rate  of  taxation  was! 
greatly  reduced.  In  succeeding  years  changes  have  been 
made  repeatedly.  Another  trial  of  progressive  rates  was! 
made  from  1893  to  1901,  but  the  proportional  plan  of  tax- 
ation was  reintroduced  in  the  latter  year,  to  be  succeeded 
by  a  graduated  tax  in  1919. 

According  to  the  law  in  force  in  the  early  years  of  the 
present  century,  a  tax  of  one  per  cent  was  imposed  uponi 
the  excess  over  $1,000  of  gross  incomes  from  all  property 
not  otherwise  taxed,  salaries  and  fees,  annuities,  and  trades 
and  professions.  The  amount  yielded  by  the  tax  in  this! 
form  was  insignificant,  although  the  receipts  had  improved 
over  those  of  earlier  years.  In  the  decade  18901900  the 
revenue  from  the  income  tax  had  ranged  from  about  $2,000 
to  $4,500  a  year.  In  the  next  decade  the  receipts  increased, 
and  furnished  from  $20,000  to  $40,000  a  year.  In  suc- 
ceeding years  the  proceeds  expanded  as  follows : z 

^Seligman,  op.  cit.,  p.  403,  et  seq. 

3  North  Carolina  Tax  Commission,  Report,  1918,  p.  20. 


IOI]    VIRGINIA,  SOUTH  CAROLINA,  NORTH  CAROLINA    IOi 

Year  of  collection  Revenue  receipts  from 

income  taxes 

1912 $36,497 

1913  42,657 

1914 50,798 

191 5  •  •  • 58,6o6 

1916 61,386 

1917  • 64,152 

1918  109,285 

'Although  the  receipts  were  steadily  expanding  during 
these  years,  the  one  per  cent  rate  on  personal  incomes  from 
specified  sources  came  to  be  considered  inadequate.  In 

1918  the  state  tax  commission  and  the  corporation  commis- 
sion strongly  advocated  a  constitutional  amendment  per- 
mitting the  extension  of  the  law  to  income  from  all  sources. 
The  program  carried  through  by  the  General  Assembly  of 

1919  was,  however,  merely  a  revision  of  the  rates,  by  which 
they  were  increased  and  made  progressive. 

According  to  the  law  of  1919  $1,000  of  the  individual's 
income,  $1,500  for  husband  and  wife  together,  and  an  equal 
amount  to  widowed  persons  with  minor  children,  were  ex- 
empted. The  rates  of  taxation  were  as  follows : 

Income  Rate  (per  cent) 

Excess  above  exemption  up  to  $2,500 I 

Excess  above  $2,500  up  to  $5,000 l*/2 

Excess  above  $5,000  up  to  $10,000 2 

Excess  above  $10,000 2}£ 

The  changes  made  in  the  law  of  1919  were  far  less 
sweeping  than  those  advocated  by  the  tax  officials  of  the 
state.  Except  for  the  introduction  of  the  progressive  scale 
given  above,  the  new  law  included  no  provisions  calculated  to 
put  the  state  into  line  with  those  which  tax  incomes  from 
all  sources  and  secure  the  enforcement  of  the  law  through 
specially  appointed  income  tax  officials  controlled  through 
a  central  administrative  bureau.  The  result  of  adhering 


102        STATE  TAXATION  OF  PERSONAL  INCOMES       [IO2 

to  the  principle  of  refusing  to  tax  incomes  from  property 
already  taxed  was  great  injustice  among  different  classes 
and  occupations.  For  example,  members  of  the  profes- 
sions were  heavily  taxed  while  richer  men  are  almost  un- 
touched by  the  general  property  tax.  It  also  became  ap- 
parent that  in  the  period  of  war  expansion  "  prosperity 
went  untaxed." 

An  amendment  to  the  constitution  was  repeatedly  and 
almost  continuously  urged  in  North  Carolina,  and  in  1920, 
in  an  extra  session  of  the  legislature,  the  amendment  was 
taken  under  consideration.  It  was  first  necessary  to  re-« 
move  the  constitutional  requirement  that  no  income  should 
be  taxed  when  the  property  from  which  it  is  derived  h 
taxed.  This  was  done,  and  a  provision  authorizing  a 
maximum  rate  of  six  per  cent  and  specified  exemptions  of 
$1,000  and  $2,000  was  favorably  acted  upon.1  The 
amendment  was  adopted  by  the  people  in  the  election  of 
November,  1920,  and  preparation  was  immediately  made 
for  the  introduction  of  a  new  and  carefully  framed  measure 
in  the  legislature  of  1921. 

In  estimating  the  significance  of  income  taxes  in  this 
group  of  states  the  types  of  incomes  derived  within  the 
states  should  be  taken  into  consideration.  In  American 
fiscal  history  of  recent  years  it  seems  to  be  an  axiom  that 
income  taxation  cannot  reach  a  high  state  of  development 
until  intangible  personal  property  has  accumulated  to  such 
an  extent  that  attempts  to  evade  its  taxation  have  become 
serious.  Obviously  this  change  takes  place  more  slowly  in 
the  states  in  which  corporate  enterprise — which  is  often 
nearly  synonymous  with  manufacturing  enterprise — is  late 
in  developing.  It  is  not  necessarily  true  that  the  difficulties 
with  intangibles  mean  the  speedy  introduction  of  taxes  on 

1  Laws  of  North  Carolina  (Special  Session),  1920,  ch.  5. 


I03]    VIRGINIA,  SOUTH  CAROLINA,  NORTH  CAROLINA 

personal  incomes,  as  the  late  entrance  of  the  state  of  New 
York  into  the  income  tax  field  proves ;  but  up  to  the  present, 
at  least,  the  generalization  holds  good, — that  without  a  dis- 
satisfaction with  the  taxation  of  intangible  personal  prop- 
erty income  taxes  are  neglected  or  only  half-heartedly 
utilized.  The  growth  of  manufacturing  in  the  South  and 
the  persevering  efforts  of  each  of  this  group  of  states  to 
reshape  the  income  tax  to  suit  changing  needs  have  an  in- 
tricate relationship. 


CHAPTER  VII 
THE  NEW  YORK  INCOME  TAX 

i.  The  history  of  the  movement 

THE  fiscal  system  of  the  state  of  New  York  has  un- 
doubtedly had  a  more  careful  scrutiny  than  that  of  any 
other  state,  on  account  of  the  magnitude  of  the  state's 
business  and  the  availability  of  financial  experts  of  varied 
interests  and  of  all  shades  of  political  opinion.  Neverthe- 
less it  was  not  until  1919  that  a  personal  income  tax  law 
was  passed,  and  then  only  after  a  most  detailed  and  careful 
study  of  the  possibilities  of  this  form  of  taxation  and  of 
the  methods  by  which  it  could  be  adapted  to  the  needs  of 
the  state  of  New  York.  As  the  history  of  taxation  in  New 
York  state  is  reviewed,  it  becomes  apparent  that  all  sign- 
posts were  pointing  towards  the  personal  income  tax  long 
before  public  opinion  was  completely  ready  for  the  new 
measure  and  before  the  minor  details  of  the  system  could 
be  fully  worked  out. 

New  York  had  no  share  in  the  early  efforts  to  reach  tax- 
paying  ability  through  the  imposition  of  faculty  taxes  and 
no  share  in  the  revivals  of  income  taxes  in  the  forties  and 
during  the  Civil  War.  For  years  the  mainstay  of  the  state, 
like  that  of  many  of  the  American  states,  was  the  general 
property  tax.  As  in  the  neighboring  state  of  Massachu- 
setts, it  was  not  until  the  country  began  to  taste  the  post- 
Civil-War  prosperity,  and  the  forms  of  personal  property 
began  to  develop,  that  the  evidence  of  the  unworkability  of 
104  [104 


THE  NEW  YORK  INCOME  TAX 


105 


the  general  property  tax  began  to  accumulate.1  The  tax- 
ation of  personal  property  became  increasingly  difficult  at 
a  time  when  state  expenditures  were  rapidly  increasing  in 
amount.  A  commission  was  appointed  to  investigate  the 
subject  of  taxation,  but  the  resulting  suggestion  of  the  ab- 
olition of  the  tax  on  personal  property,  made  in  1871  and 
1872,  was  two  generations  ahead  of  its  time,  and  it  was 
not  adopted.  Action  was  necessary,  however.  From 
1880  until  the  present  the  tax  system  of  New  York  has 
been  changed  and  changed  again,  in  the  effort  to  adapt  it  to 
the  changing  industrial  and  commercial  situation  of  the 
state.  Hardly  more  than  two  or  three  years  have  passed, 
from  that  date  to  this,  without  an  experimental  change  in 
the  state  revenue  system.  In  1880  a  corporation  tax,  based 
in  part  upon  gross  receipts,  made  its  appearance.  From 
1885  the  influence  of  an  effort  to  obtain  separation  of 
source  is  seen  in  the  tax  measures  adopted.  In  that  year 
a  collateral  inheritance  tax  was  adopted.  In  the  follow- 
ing year  a  new  corporation  tax,  the  "  organization  "  tax, 
was  added.  In  1890  the  collateral  inheritance  tax  became 
a  direct  inheritance  tax.  In  the  nineties  the  movement  to 
aboish  or  to  minimize  the  state  direct  tax  gained  additional 
strength.  Various  new  taxes  were  added  in  that  and  the 
next  decade,  with  so  great  an  increase  of  revenue  from 
other  sources  that  the  state  direct  tax  played  almost  no 
part  in  the  state  revenue  system  from  that  year  until  1912. 
In  the  course  of  these  years  of  experimentation  many  ad- 
mirable changes  were  made  and  fruitful  sources  of  revenue 
were  tapped,  but  the  old  prime  difficulty,  that  of  the  under- 
assessment and  the  inequality  of  assessment  of  personal. 
property  was  hardly  touched.  Professor  Seligman,  who 
followed  the  situation  from  the  early  eighties  and  who 

1  E.  R.  A.  Seligman,.  "  The  New  York  Income  Tax,"  Political  Science 
Quarterly,  vol.  xxxiv,  no.  4  (Dec.  1919),  p.  521. 


I06       STATE  TAXATION  OF  PERSONAL  INCOMES       [IO6 

was  influential  in  bringing  about  the  passage  of  several 
of  the  new  measures,  describes  the  situation  after  1912  as 
follows : 1 

Personal  property  had  almost  entirely  disappeared  from  the  as- 
sessment lists,  so  that  the  local  tax  had  become  virtually  a  tax  on 
real  estate.  As  the  local  expenses  increased  by  leaps  and  bounds 
and  as  the  base  of  taxation  was  gradually  narrowed  instead  of 
broadened,  the  tax  rate  began  to  climb  to  alarming  figures.  The 
real-estate  interests  now  clamored  for  relief ;  and  the  public  at 
large,  which  realized  that  the  tax  on  buildings  at. least  was  shifted 
to  them  in  the  shape  of  increased  rent,  seconded  the  effort  of  the 
real-estate  owners. 

In  1915  two  committees  were  at  work  on  the  problem  of 
taxation  in  the  state  of  New  York:  the  Joint  Legislative 
Committee  on  Taxation,  known  as  the  "  Mills  Committee  " 
on  account  of  the  fact  that  Senator  Mills  was  at  its  head, 
and  the  Committee  on  Taxation  of  the  City  of  New  York, 
appointed  by  Mayor  Mitchel  and  known  as  the  "  Mayor's 
Committee."  Two  main  problems  were  handled, — the 
raising  of  new  and  additional  revenue  for  the  state,  and  the 
just  and  equitable  distribution  of  the  tax  burden.  The  two 
committees  worked  in  close  cooperation,  realizing  the  neces- 
sity for  the  most  effective  action  in  view  of  the  seriousness 
of  the  tax  situation.  The  Mayor's  Committee,  upon  which 
Professor  Seligman  was  serving  as  chairman  of  its  execu- 
tive committee,  studied  extensively  a  single-tax  plan  of 
taxation  and  a  classified  property  tax,  but  came  to  the  con- 
clusion that  neither  was  adapted  to  the  needs  of  New  York, 
and  turned  to  the  income  tax.  In  the  meantime  the  Mills 
Committee  had  obtained  the  assistance  of  Professor  H.  A1. 
E.  'Chandler  of  Columbia  University,  who  took  a  large 
part  in  the  drafting  of  its  final  report,  and  another  drift 

1  Seligman,  op.  tit.,  p.  525. 


THE  NEW  YORK  INCOME  TAX 

of  opinion  in  the  direction  of  a  state  income  tax  was  incor- 
porated in  this  committee's  report.  The  situation  with  re- 
gard to  the  state  income  tax  was  manifestly  changing  with 
great  rapidity  from  year  to  year.  The  federal  income  tax 
of  1913  had  demonstrated  the  feasibility  of  the  use  of  the 
income  tax  principle  itself  and  had  familiarized  the  public 
with  the  machinery  of  its  administration.  The  device  wast 
already  being  extended.  In  1914,  when  the  tax  situation  in 
Connecticut  was  serious  and  revision  became  necessary, 
Professor  Seligman  suggested  to  the  state  legislature  and 
to  the  tax  commissioner  of  Connecticut  the  adoption  of  a 
state  corporate  income  tax  and  the  utilization  of  duplicates 
of  the  returns  made  to  the  federal  government.  The  sug- 
gestion resulted  in  the  adoption  of  the  plan,  with  the  re- 
sult that  a  movement  for  state  income  taxes  based  on  the 
federal  tax  was  inaugurated. 

The  Mayor's  Committee  reported  in  January,  1916,  and 
the  Mills  Committee  reported  to  the  legislature  in  the  fol- 
lowing month.  In  both  reports  the  adoption  of  a  state 
income  tax  with  a  division  of  the  yield  between  the  state 
and  the  localities  was  recommended.  In  the  report  of  the 
Mills  Committee  the  defects  of  the  tax  system  of  the  state 
of  New  York  as  it  stood  at  the  time  the  report  was  made 
were  set  forth  in  an  uncompromising  fashion :  * 

Were  the  people  of  New  York  once  aroused  to  the  full  extent  of 
evasions  under  the  present  law,  another  year  could  not  pass  with- 
out an  important  tax  reform.  .  .  .  Our  present  law  is  based  upon 
the  theory  that  earning  power  is  fairly  represented  by  property 
and  especially  real  property.  However,  a  superficial  knowledge 
of  business  of  today  discloses  the  fact  that  quite  the  contrary  is 
true.  As  a  result  of  this  inconsistency  between  the  law  and  the 
fact,  we  have  permitted  an  important  part  of  our  well-to-do  citizens 

1  (New   York)    Joint   Legislative    Committee  on   Taxation,   Report, 
1916,  p.  28,  et  seq. 


I08       STATE  TAXATION  OF  PERSONAL  INCOMES       [108 

to  grow  up  and  enjoy  large  incomes,  and  therefore  large  taxpaying 
ability,  without  actually  requiring  them  to  bear  their  share  of  the 
burden. 

In  this  report  the  injustices  brought  about  by  the  opera- 
tion of  the  law  are  pointed  out  in  detail :  the  burden  of  the 
tax  upon  real  estate  owners;  the  "crushing  force"  of  the 
taxes  upon  those  least  able  to  pay,  and  the  unfairness  of 
the  system  in  its  effect  upon  various  classes  of  persons  and 
enterprises. 

The  committee  answered  the  question  submitted  to  it 
by  the  legislature,  namely,  "  how  can  the  state  most  equit- 
ably and  effectively  reach  all  property  which  should  be  sub- 
jected to  taxation  and  avoid  conflict  and  duplication  of  tax- 
ation on  the  same  property?  "  in  the  following  concise  sum- 
mary: * 

.  .  .  All  of  the  evidence  presented  and  all  our  investigations  tend 
to  show  that  the  end  sought  for  will  be  accomplished  best  by: 
( 1 )  the  abolition  of  the  present  tax  on  personal  property ;  ( 2 )  the 
withdrawal  of  general  business  incomes  from  the  provisions  of 
section  182  of  the  tax  laws;  and  (3)  the  imposition  of  an  income 
tax  on  individuals  and  general  business  corporations,  including 
manufacturing  corporations. 

The  first  step  was  taken  with  the  passage  of  a  corpora- 
tion income  tax  law,  known  as  the  "  Emerson  law,"  in 
ipiy.2  According  to  the  terms  of  this  law  a  franchise 
tax  of  three  per  cent  was  imposed  on  the  net  income  of 
manufacturing  and  mercantile  corporations.  Two-thirds 
of  the  yield  of  the  tax  was  allotted  to  the  state  and  one-third 
to  the  localities.  This  law  was  successful  as  a  revenue- 
producer,  for  it  yielded  $18,000,000  in  the  first  year  of  its 
operation,  but  it  was  far  from  being  a  perfect  piece  of  tax: 

llbid.,  p.  206. 

2  Laws  of  New  York,  1917,  ch.  726. 


THE  NEW  YORK  INCOME  TAX  IOg 

legislation.  It  was  soon  found  that  the  larger  cities  of  the 
state  were  not  deriving  a  sufficient  amount  of  revenue  from 
the  new  law  to  make  up  for  the  loss  of  personal  taxes,  and 
protests  were  soon  heard  from  that  quarter.1  The  nomen- 
clature of  the  act  was  confusing  in  its  application  of  the 
tax  to  "  manufacturing  and  mercantile  "  corporations  only. 
Moreover,  in  the  light  of  the  additional  information  about 
the  operation  of  state  income  taxes  which  was  accumula- 
ting with  each  passing  year,  it  became  clear  that  a  tax  of 
this  kind,  imposed  on  the  net  income  of  corporations,  was 
only  remotely  connected  with  the  taxation  of  personal  in- 
comes, and  that  it  was  not  a  tax  which  could  reach  the 
roots  of  the  trouble  with  the  taxation  of  intangibles.  Such 
a  tax  as  the  New  York  corporation  income  tax  was  coming 
to  be  regarded  as  a  bitsiness  tax,  closely  related  to  a  tax  on 
real  property.  This  fact  was  recognized  in  recommendations! 
made  in  1918  by  the  committee  of  the  National  Tax  Associa- 
tion which  was  appointed  to  devise  a  model  system  of  state 
and  local  taxation.  In  the  system  recommended  by  that  com- 
mittee a  proportional  tax  on  the  net  income  derived  from 
business  as  a  tax  or  excise  with  respect  to  carrying  on  or 
doing  business  is  included,  but  this  tax  is  but  one  of  the 
constituent  parts  of  a  three-fold  system,  of  which  the  other 
two  members  are  a  personal  income  tax  and  a  property  tax. 
Meanwhile  other  committees  were  still  working  on  the 
question  of  the  personal  income  tax.  A  committee  on  in- 
dividuals and  partnerships  reported  at  the  seventh  state  con- 
ference on  taxation  in  January,  1917,  recommending  the 
adoption  of  a  state  income  tax.  The  Advisory  Council  of 
Real  Estate  Interests  obtained  the  assistance  of  Professor 
H.  A.  E.  Chandler  and  proceeded  to  continue  the  investi- 

1  Powell,  "  State  Income  Tax  on  Corporations,"  Proceedings  of  the 
Eighth  State  Tax  Conference,  1919,  p.  327. 


IIO       STATE  TAXATION  OF  PERSONAL  INCOMES       [nO 

gations  begun  under  Professor  Chandler  for  the  Millsi 
Committee.  As  a  result  this  committee  also  reported  in 
favor  of  a  personal  income  tax  law.  In  the  annual  re- 
port for  1918  the  state  tax  commission  urgently  recom- 
mended the  adoption  of  a  state  income  tax  law  at  a  low 
rate  and  with  small  deductions.  Finally,  in  1919,  a  legisla- 
tive committee,  the  "  Davenport  Committee/*  was  again 
set  to  work  on  the  income  tax.  This  committee  obtained 
the  services  of  experts,  and  made  Professor  Seligman  of 
Columbia  the  chairman  of  one  of  the  sub-committees  and 
Professor  Bullock  of  Harvard  the  chairman  of  another. 
Mr.  Laurence  A.  Tanzer  of  New  York  City  was  counsel 
for  the  committee.  The  various  possibilities  and  alterna- 
tives to  a  personal  income  tax  were  thoroughly  worked  out. 
Finally  a  report  in  favor  of  a  personal  income  tax  was  ac- 
cepted, and  early  in  1919  the  committee  presented  a  bill  for 
the  imposition  of  an  income  tax.  The  bill  was  framed  with 
the  greatest  possible  care  and  with  the  advice  tnd  help  of  the 
tax  experts  whose  assistance  the  committee  had  enlisted. 
The  bill  bore  the  traces  of  the  same  skill  and  consideration  of 
details  which  are  to  be  seen  in  the  proposals  of  the  committee 
on  model  taxation.  It  was  passed  without  substantial 
changes,  except  for  the  fact  that  the  administration  of  the 
tax  was  put  in  the  hands  of  the  state  comptroller  rather  than 
the  state  tax  commission.  Thus  after  years  of  consideration, 
the  greatest  industrial  state  was  enabled  to  begin  the  utiliza- 
tion of  a  personal  income  tax  in  the  following  year,  1920. 
The  adoption  of  the  tax  in  New  York  is  the  result  of  im- 
partial and  far-sighted  effort  on  the  part  of  many  inter- 
ested citizens,  but  probably  most  of  all  to  Professor  Selig-^ 
man,  who  labored  indefatigably  for  the  tax  from  the  time 
of  the  successful  culmination  of  the  efforts  for  a  federal 
tax  to  the  final  passage  of  the  New  York  income  tax  law 
in  1919. 


I !  j  ]  THE  NEW  YORK  INCOME  TAX  !  j  j 

2.  T/J£  present  income  tax-  law 

According  to  the  personal  income  tax  law  passed  in  New 
York  in  1919  x  a  moderately  progressive  tax  is  imposed  on 
the  incomes  of  residents  and  on  the  incomes  of  non-resid- 
ents from  sources  within  the  state.  The  rates  of  taxation 
and  the  corresponding  classes  of  income  are  as  follows : 

Net  income  Rate  (per  cent) 

First  $10,000    i 

Next  $40,000 2 

Above  $50,000   3 

In  the  matter  of  rates  and  the  degree  of  progression 
adopted  the  New  York  law  failed  to  follow  the  federal  law 
or  the  recommendations  of  the  committee  on  model  tax- 
ation. The  decision  was  a  wise  one  with  respect  to  both 
examples.  'Such  a  scale  of  rates  as  that  used  in  the  im- 
position of  the  federal  income  tax  was  manifestly  absurd 
if  applied  to  state  purposes  and  taken  in  conjunction  with 
the  decision  to  include  in  net  income  sums  paid  as  income 
taxes  to  any  jurisdiction.  The  confiscation  of  the  entire 
income  would  be  the  result  in  the  case  of  some  of  the  very 
large  incomes  the  recipients  of  which  are  known  to  be 
domiciled  in  New  York.  Even  if  such  a  scale  were  pos- 
sible, the  result  would  be  so  great  a  revenue  to  the  state 
that  extravagant  and  wasteful  dispositions  of  the  surplus 
would  become  the  order  of  the  day.  The  contrast  of  the 
scale  actually  adopted  by  New  York  and  the  scale  recom- 
mended by  the  Committee  on  Model  Taxation  and  illus- 
trated in  the  draft  of  a  model  personal  income  tax  law  pre- 
pared by  that  committee  is  more  significant.  The  progres- 
sive scale  recommended  ranged  from  one  per  cent  on  the 
first  $1,000  of  net  income  to  six  per  cent  on  net  income 

1  Laws  of  New  York,  1919,  ch.  627. 


!  !  2        STATE  TAX  A  TION  OF  PERSONAL  INCOMES       [II2 

above  $5,000.  In  view  of  the  careful  consideration  given 
by  the  framers  of  the  New  York  law  to  the  point  of 
view  expressed  by  the  committee  on  model  taxation,  the 
introduction  of  a  more  moderate  scale  in  the  New  York 
law  illustrates  the  trend  of  the  times.  The  high  federal 
rates  must  be  the  background,  never  to  be  ignored,  of  all 
income  taxes  of  the  present.  Only  the  most  moderate 
state  rates  can  operate  without  injustice  as  long  as  the 
present  policy  of  the  federal  government  is  continued.  It 
is  an  open  question  as  to  whether  a  simple  proportional 
rate,  as  for  example,  two  per  cent  on  net  income,  might  not 
be  equally  satisfactory  and  accomplish  all  necessary  results, 
under  the  present  circumstances.  Moreover,  the  states  are 
not  in  need  of  such  great  amounts  of  revenue  at  the  present 
time  as  to  necessitate  steeply  graduated  rates. 

This  tax  applies  to  the  incomes  of  individuals  only,  as 
the  incomes  of  corporations  are  subject  to  a  separate  tax.1 
Personal  exemptions  were  fixed  at  $1,000  for  the  indi- 
vidual, $2,000  for  the  head  of  a  family  or  for  husband  and 
wife  together,  and  $200  additional  for  each  dependent.2 
In  the  definition  of  gross  income  and  in  enumerating  the 
deductions  which  are  to  be  made  from  gross  income  in  the 
determination  of  net  income  the  New  York  law  follows  the 
federal  law  fairly  closely. 

In  addition  to  the  specific  personal  exemptions,  interest 
on  obligations  of  the  United  States  and  its  possessions,  in- 
terest of  obligations  of  the  state  of  New  York  or  of  any 

1  In  1919  the  tax  on  the  net  income  of  corporations  was  raised  from 
three  to  four  and  one-half  per  cent  and  extended  to  apply  to  all  cor- 
porations. 

5  In  the  law  as  passed  in  1919  these  exemptions  were  denied  to  non- 
residents. The  decision  of  the  United  States  Supreme  Court  that  such 
a  provision  was  unconstitutional  and1  the  amendment  for  the  New  York 
law  in  conformance  with  this  decision  are  described  in  subsequent 
pages. 


H3]  THE  NEW  YORK  INCOME  TAX 

municipal  corporation  or  political  subdivision  thereof ;  com- 
pensation received  from  the  United  States;  income  re- 
ceived by  an  officer  of  a  religious  denomination  or  by  an 
institution  or  trust  for  religious,  charitable,  philanthropic, 
educational,  or  other  similar  specified  purposes  and  used 
for  such  purposes;  proceeds  of  life-insurance  policies  or 
annuities;  accident  or  health  insurance;  and  property  ac- 
quired by  gift  or  bequest  were  also  exempted.  Dividends 
from  corporations  are  included  in  the  income  of  residents, 
but  excluded  from  the  income  of  non-residents,  except  as 
they  form  part  of  the  income  derived  by  such  non-residents 
from  sources  within  the  state.  At  the  time  of  the  passage 
of  the  law  this  provision  was  vigorously  debated.  The 
dividends  received  by  non-residents  could  have  been  taxed 
only  if  received  from  domestic  corporations,  and  it  was 
held  that  New  York  institutions  would  have  been  unjustly 
discriminated  against  if  this  were  done.  In  order  to  bring 
about  a  fair  operation  of  this  principle,  not  only  dividends, 
but  interest  on  bank  deposits,  bonds,  notes,  and  sums  re- 
ceived as  annuities  were  also  exempted  in  the  case  of  non- 
residents. 

The  taxation  of  dividends  received  by  residents  of  New 
York  is  in  itself  a  departure  from  the  federal  law,  which 
allows  a  partial  exemption  from  the  income  tax  of  divi- 
dends of  corporations.  It  is  becoming  increasingly  evident 
that  a  tax  on  the  net  income  of  corporations  is  a  business, 
tax,  to  be  considered  as  a  supplement  to  the  personal  in- 
come tax  rather  than  as  a  substitute  for  it.  From  this 
point  of  view  the  taxation  of  the  corporate  income  and  the 
taxation  o>f  income  received  by  individuals,  even  if  a  part 
of  this  latter  income  is  from  corporate  sources,  is  no  longer 
regarded  as  unjust  double  taxation,  unless  it  operates  un- 
equally with  respect  to  different  classes  of  business  or  dif- 
ferent classes  of  individuals.  The  real  effect  of  the  use 


1I4        STATE  TAXATION  OF  PERSONAL  INCOMES        [II4 

of  a  corporate  income  tax  and  an  individual  income  tax 
in  the  same  jurisdiction  is  not  so  much  to  bring  about  any 
unfairness  in  the  tax  burden  as  it  is  to  effect  a  heavier  rate 
of  taxation  upon  funded  incomes  than  upon  unfunded  in- 
comes, a  policy  which  is  in  accordance  with  the  best  modern 
tax  theory.  Such  a  policy  is  particularly  adapted  to  the 
needs  of  New  York,  where  the  question  of  a  differentiation 
of  the  kinds  of  income  and  the  imposition  of  a  higher  rate 
of  tax  upon  "  unearned "  incomes  was  decided  in  the 
negative.  With  regard  to  differentiation  produced  in  the 
latter  way,  it  was  decided  that  in  the  interests  of  simplicity, 
and  in  view  of  the  fact  that  the  graduated  rates  of  the 
federal  tax  imposed  a  heavier  burden  upon  those  funded  in-* 
comes  which  are  in  fact  found  among  the  larger  incomes, 
no  discrimination  should  be  made.  The  discrimination 
which  is  actually  produced  by  the  system  of  taxation  now 
employed  is  probably  slighter  than  that  introduced  in  the 
ordinary  differentiation  plans,  less  irritating  to  the  tax- 
payer, and  less  difficult  from  the  administrative  point  of 
view. 

The  deductions  which  are  permitted  in  the  determination 
of  net  income  are  business  expenses,  taxes  other  than  in- 
come taxes  paid  to  the  United  States  or  to  any  state,  losses, 
worthless  debts,  interest  on  indebtedness,  and  gifts  (to  the 
amount  of  not  more  than  1 5  per  cent  of  net  income)  to  re* 
ligious,  charitable,  scientific  or  educational  corporations  or 
associations  organized  under  the  laws  of  New  York.  The 
law  as  passed  in  1919  contained  a  provision  for  the  de- 
duction of  interest  on  indebtedness  which  differed  from  that 
contained  in  the  federal  law.  The  state  law  allowed  the 
deduction  of  only  such  a  proportion  o>f  interest  paid  as  the 
net  taxable  income  bore  to  the  total  income.  This  pro- 
vision corresponds  to  a  provision  in  the  preliminary  report 
of  the  Committee  on  Model  Taxation.  That  committee  called 


II5]  THE  NEW  YORK  INCOME  TAX 

attention  to  the  fact  that  the  issue  by  the  federal  govern- 
ment of  large  amounts  of  tax-exempt  bonds  complicated  the 
question  of  the  taxation  of  incomes  by  the  states,  and  in 
suggesting  the  above  plan  for  limiting  interest  deducted, 
stated  its  opinion  that  "any  other  procedure  will  tend  ta 
make  the  personal  income  tax  a  farce  in  many  cases  and 
will  give  occasion  for  legitimate  complaint."  This  pro- 
vision has  little  to  recommend  it  except  its  intentions,  how- 
ever, for  the  calculation  is  impossible  to  make,  since  net  in- 
come cannot  be  produced  until  the  amount  of  deductions 
has  been  determined.  It  proved  unpopular  in  New  York 
and  the  law  repealing  it  was  made  retroactive  to  January 

I,   I920.2 

Income  taxes  were  omitted  from  the  list  of  taxesi 
deductible  from  gross  income.  It  was  felt  that  the  taxable 
base  ought  not  to  be  affected  by  the  taxes  paid  to  other 
jurisdictions.  A  provision  was  adopted  which  was  counted 
upon  to  prevent  burdensome  double  taxation  in  a  wholly 
different  way.  A  non-resident  subject  to  the  income  tax  of 
another  state  or  country  is  allowed  to  be  credited  with  such 
a  proportion  of  the  income  tax  payable  to  New  York 
as  his  income  taxable  by  New  York  bears  to  his  entire  in- 
come taxed  by  the  other  state  or  country,  provided  the  laws 
of  the  latter  grant  a  substantially  similar  credit  to  residents 
of  New  York. 

At  the  time  of  the  passage  oi  the  personal  income  taxi 
law  the  taxation  of  intangible  personal  property  as  pro- 
perty was  abolished,  but  the  taxation  of  tangible  personal 
property  was  allowed  to  continue. 

In  matters  of  administration  the  New  York  income  tax 
law  is  in  most  respects  in  accord  with  the  best  modern  pro- 
cedure. The  weakness  of  the  older  method  of  local  as- 

1  Preliminary  Report,  etc.,  p.  15. 

2  Law s  of  New  York,  1920,  ch.  693. 


!  j  6       STA  TE  TAX  A  TION  OF  PERSONAL  INCOMES       [n6 

sessment  of  income  taxes  had  become  a  matter  of  universal 
knowledge  by  1919.  No  other  course  was  open  but  to 
provide)  central  administration.  The  natural  disposition 
of  the  state  income  tax  was  in  the  hands  of  the  state  tax 
commission,  which  has  charge  of  the  assessment  of  the 
franchise  tax  on  corporations.  Collection  would  naturally 
have  gone  to  the  state  comptroller.  The1  passage  of  the  in- 
come tax  law  was  urged  by  the  state  tax  commission  and 
opposed  by  the  state  comptroller.  In  the  end,  and  as  the 
result  of  political  considerations,  the  entire  administration 
of  the  law,  including  assessment  as  well  as  collection,  was 
left  to  the  state  comptroller.  The  comptroller  was  em- 
powered to  divide  the  state  into  income  tax  districts  and  to 
establish  branch  offices  in  these  districts.  In  actually  work- 
ing out  the  system  advances  were  made  over  the  simple 
directions  contained  in  the  law.  A  state  income  tax) 
bureau  was  established  as  a  separate  branch  of  the  comp- 
troller's office  and  Mr.  Mark  Graves;  was  appointed  in- 
come tax  director,  to  have  entire  charge  of  the  administra- 
tion. It  became  the  practice  of  the  bureau  to  issue  fre- 
quent statements,  reports,  and  instructions,  and  to  make  the 
details  of  the  operation  of  the  state  income  tax  matters 
of  common  knowledge.  In  1921  a  new  tax  commission 
was  organized  and  the  administration  of  the  income  tax 
was  put  into  the  hands  of  the  new  organization. 

With  regard  to  collection  and  information  at  the  source, 
New  York  has  undertaken  an  experiment  the  outcome) 
of  which  is  still  in  doubt,  although  the  operation  of  the 
law  during  its  first  year  has  been  regarded  as  almost  unquali- 
fiedly successful.  Collection  at  the  source  was  adopted  for 
the  incomes  of  non-residents  in  the  law  as  it  was  passed 
in  1919.  In  order  that  the  employer  should  not  act  as 
judge  on  a  question  of  residence,  it  was  required  that  the 
tax  should  be  deducted  in  every  case  in  which  the  salary 


Uj]  THE  NEW  YORK  INCOME  TAX 

amounted  to  $1,000  or  more,  unless  the  employee  filed  a 
certificate  that  he  was  a  resident  of  the  state.  This  with^ 
holding  at  the  source  was  required  only  in  the  case  O'f 
salaries  and  other  compensation  for  personal  services. 
Owing  to  an  oversight  an  unexpected  difficulty  developed. 
The  income  tax  bill  in  the  original  form  in  which  it  was 
presented  to  the  legislature  provided  for  a  tax  on  individual 
inclines  at  a  uniform  rate  of  two  per  cent,  and  the  rate  of 
withholding  stood  at  two  per  cent  to  correspond  with  the 
tax  rate.  In  the  course  of  the  discussion  of  the  bill  in  the 
legislature  the  income  tax  rates  were  changed  to  one,  two, 
and  three  per  cent  on  different  amounts  of  income,  but  the 
corresponding  change  in  the  amount  to  be  withheld  at  the 
source  was  neglected.  While  the  first  collections  were 
being  made  the  attorney-general  and  the  comptroller  ruled 
that  an  employer  need  not  withhold  more  than  one  per 
cent  on  salaries  not  exceeding  $10,000.  In  May,  1920,  the 
law  was  changed  so  as  to  provide  for  withholding  for  com- 
pensation for  personal  services  of  non-residents  at  the  rates 
of  one,  two,  and  three  per  cent.1  The  provision  that  re- 
sidents might  be  excluded  from  the  withholding  by  filing 
certificates  of  residence  was  continued. 

The  usefulness  of  such  a  provision  for  collection  at  the 
source  remains  to  be  demonstrated.  At  the  time  when  col- 
lection at  the  source  was  tried  under  the  federal  income  tax! 
act  dissatisfaction  was  almost  universal.  The  Committee 
on  Model  Taxation  regards  collection  at  the  source  as  un- 
desirable for  the  reason  that  the  trouble  of  taxpaying  and 
possibly  even  a  part  of  the  tax  burden  itself  is  passed  on 
from  the  person  upon  whom  taxpaying  should  devolve. 
These  experimental  results  concerning  collection  at  the  source 
are  not  exactly  applicable  to  New  York,  however,  as  the 

1  Laws  of  New  York,  1920,  ch.  691.    Effective  May  10,  1920. 


n8        STATE  TAXATION  OF  PERSONAL  INCOMES 

withholding  in  New  York  applies  only  to  the  incomes  of 
non-residents,  and  only  to  salaries  and  the  compensation  for 
personal  services  received  by  such  non-residents.  Several 
other  states  tax  the  income  of  non-residents  derived  from 
sources  within  the  state  levying  the  income  tax,  but  aside 
from  New  York  no  state  attempts  to  collect  the  tax  oil  such 
incomes  at  the  source.  The  arguments,  for  collection  at 
the  source  for  incomes  of  non-residents  are  good,  parti- 
cularly with  respect  to  the  prevention  of  evasion.  It  re- 
mains to  be  seen  whether  the  burden  imposed  upon  the 
persons  or  corporations  paying  the  compensation  for  per- 
sonal services  is  so  heavy  that  dissatisfaction  becomesl 
general. 

Information  at  the  source  is  required  very  much  as! 
under  the  federal  law.  Such  information  is  required 
concerning  all  payments  of  $1,000  or  more.  For  failure 
to  make  a  return,  or  for  fraud,  a  fine  of  not  more  than 
$1,000  may  be  imposed  and  a  double  tax  paid  on  the  tax; 
not  originally  paid.  Lighter,  penalties  are  provided  for 
delinquent  returns  made  voluntarily  and  for  delayed  tax 
payments. 

Like  Wisconsin  and  Massachusetts,  New  York  distributes; 
a  part  of  the  proceeds  of  the  income  tax  to  the  locali- 
ties. At  the  time  when  the  New  York  income  tax  act  was 
passed  the  needs  of  the  state  and  the  localities  for  ad- 
ditional revenue  were  ever-increasing.  The  income  tax 
promised  to  satisfy  this  demand  as  well  as  to  remedy  some 
of  the  most  conspicuous  defects  in  the  existing  property  tax 
system.  Accordingly  the  principle  of  division  of  yield  was 
adopted.  After  the  retention  of  a  fund  of  $250,000  for 
the  payment  of  refunds  and  abatements,  the  comptroller 
was  instructed  to  pay  50  per  cent  of  the  remainder  into 
the  state  treasury  and  to  distribute  the  equivalent  sum 
among  the  counties  in  proportion  to  the  assessed  valuations 


II9]  THE  NEW  YORK  INCOME  TAX  ng 

of  real  estate  in  the  counties.  The  county  treasurers  were 
required  to  apportion  the  amount  received  among  the  cities 
and  towns  in  proportion  to  the  assessed  valuations  oi  real 
property.  Each  city's  share  goes  into  the  city's  general 
funds,  and  each  town's  share  is  credited  against  the  amount 
of  the  county  tax  payable  against  it.  These  provisions  bring1 
about  a  tendency  in  the  assessment  of  real  estate  which 
counteracts  the  ordinary  effects  of  the  assessment  mach- 
inery. Under  the  present  income  tax  law,  the  higher  the 
assessments  in  any  locality  the  greater  the  share  of  the 
proceeeds  of  the  income  tax  which  that  locality  is  entitled 
to  receive;  while  the  old  system  encouraged  the  under- 
valuation o>f  real  estate  so  that  the  localities  might  lighten 
their  shares  of  the  general  tax. 

This  requirement  of  a  distribution  to  the  localities  of 
one-half  of  the  proceeds  O'f  the  income  tax  resulted  in  the 
early  support  for  the  tax  from  individuals  and  localities 
which  might  ordinarily  have  been  sceptical  of  the  effects 
upon  business  oi  a  progressive  tax  on  personal  incomes. 
In  fact,  a  committee  appointed  by  the  Conference  of 
Mayors  came  promptly  to  the  assistance  of  the  state  comp- 
troller when  the  constitutionality  of  the  income  tax  act 
was  questioned.1 

The  question  of  the  proper  distribution  of  the  proceeds 
of  the  income  tax  is  not  one  which  may  be  answered  simply 
by  pointing  to  the  probable  efficacy  of  the  particular  plan 
adopted  in  New  York  in  bringing  about  a  better  assessment 
of  real  property.  The  New  York  plan  has  been  severely 
criticized,  principally  on  the  ground  that  since  the  in- 
come tax  is  supposed  to  tap  sources  of  revenue  which  were 
untouched  by  the  general  property  tax,  a  distribution  ac- 
cording to  the  assessed  value  of  real  estate  has  little  per- 

1  New  York  Times,  l>ec.  14,  1919. 


I2o       STATE  TAXATION  OF  PERSONAL  INCOMES       [120 

tinence  or  meaning.1  This  was  acknowledged  in  a  discus- 
sion at  the  annual  meeting  of  the  National  Tax  Associa- 
tion in  1919,  when  a  well-known  Wisconsin  expert  refer- 
red to  the  New  York  plan  as  "  less  logical  but  more  prac- 
tical "  than  the  Wisconsin  plan  of  distribution  according 
to  the  derivation  of  the  tax.  The  "  practical "  aspects  of 
the  New  York  plan  are  apparently  conceived  to  be  the  ap- 
pearances of  relief  with  which  the  local  body  of  taxpayers 
receive  the  funds  distributed  by  the  state  comptroller.  On 
the  other  hand,  distribution  according  to  source  is  regarded 
in  Massachusetts  as  conducive  to  great  injustice,  and  dis- 
tribution according  to  the  apportionment  of  the  state  tax 
as  a  fairer  method.2  It  is  plain  that  income  tax  method 
has  not  yet  progressed  far  enough  to  yield  as  definite  re- 
sults with  regard  to  proper  distribution  as  with  administra- 
tion, and  the  New  York  plan  is  neither  to  be  criticized  or 
approved  until  it  has  'been  tried  out  over  a  longer  period. 
The  career  of  the  New  York  provision  for  the  taxation 
of  non-residents  was  destined  to  be  eventful.  The  ques- 
tion of  the  constitutionality  of  taxing  the  incomes  of  non- 
residents had  been  recognized  as  one  which  was  likely  to 
become  pressing  since  the  first  application  of  the  Wiscon- 
sin law  to  such  incomes.  When  this  form  of  taxation  was 
finally  determined  upon  in  New  York  the  question  took  on 
a  new  aspect,  for  New  York  is  unique  not  only  in  its  tax- 
paying  ability  in  comparison  with  the  rest  of  the  country 
but  also  in  the  extent  to  which  incomes  are  earned  within 
its  borders  by  non-residents.  The  situation  was  described 
by  Professor  Seligman  as  follows:8 

1  A.  E.  Holcomb,  "  State  Income  Taxes,"  Bulletin  of  the  National 
Tax  Association,  vol.  vi,  no.  4  (Jan.  1921),  p.  127. 

3  Report  of  the  (Massachusetts)  Joint  Special  Committee  on  Taxa- 
tion, 1919,  pp.  50,  51. 

SE.  R.  A.  Seligman,  "The  Taxation  of  Non-Residents  in  the  New- 
York  Income  Tax,"  Bulletin  of  the  National  Tax  Association,  vol.  v, 
no.  2  (Nov.  1919),  p.  41. 


I2i]  THE  NEW  YORK  INCOME  TAX  121 

In  many  of  the  less  advanced  states  of  the  union  the  great 
majority  of  incomes  within  the  state  are  earned  by  residents  of 
the  state ;  that  is  to  say,  there  are  comparatively  few  non-residents 
who  sojourn  for  a  protracted  period  within  the  state.  And,  on  the 
other  hand,  most  of  the  residents  of  the  state  secure  all  or  a  very 
large  part  of  their  revenue  from  property  situated  or  business 
conducted  within  the  state.  In  New  York,  however,  the  situation 
is  very  different.  In  the  first  place,  New  York  City,  as  the  great 
metropolitan  center,  attracts  people  from  all  over  the  country. 
Not  only  do  they  swarm  to  New  York  for  weeks  or  months  at  a 
time,  but  a  large  number  of  wealthy  individuals,  who  still  retain 
their  legal  residence  in  other  states,  erect  princely  mansions  in 
New  York  and  live  there  most  of  the  year.  On  the  other  hand, 
New  York  is  the  financial  center  of  the  country :  we  know  that 
more  than  one-third  of  the  individual  income  tax  of  the  entire 
country  is  paid  in  New  York.  This  means  that  the  wealthy  resi- 
dents of  New  York  own  a  large  part  of  the  property  of  the 
nation  and  that  the  incomes  received  in  New  York  are  to  a  con- 
siderable extent  received  from  sources  outside  the  state.  Finally, 
New  York  as  the  industrial  center  of  the  country  is  crowded 
with  hundreds  of  thousands  of  members  of  the  professional  classes 
and  of  wage-earners  who  get  their  living  in  the  city  but  who 
commute  to  the  suburbs.  Northern  New  Jersey  and,  to  a  less 
extent,  southwestern  Connecticut,  are  nothing  but  suburbs  of  New 
York. 

Thus  from  both  points  of  view  the  question  of  double  taxation, 
i.  e.,  the  taxation  of  non-residents  on  income  received  within  the 
state  and  of  residents  on  incomes  received  without  the  state,  as- 
sumes in  New  York  a  significance  which  in  practice  far  tran- 
scends that  in  any  other  part  of  the  country. 

In  working  out  the  plan  which  was  finally  adopted  in 
New  York,  namely,  that  o>f  the  taxation  of  non-residents 
on  income  derived  from  sources  within  the  state  of  New  . 
York  and  the  taxation  of  residents  on  all  income,  these 
facts  were  carefully  taken  into  consideration.  It  was  plain 
that  the  taxation  of  incomes  from  within  the  state  only, 
while  practicable  in  a  debtor  state  like  Wisconsin,  would 
mean  the  exclusion  of  the  high  proportion  o>f  income  re- 


122        STATE  TAXATION  OF  PERSONAL  INCOMES       [122 

ceived  by  residents  of  New  York  from  outside  the  state. 
The  revenue  that  New  York  would  receive  from  its  tax- 
payers would  be  insignificant  compared  with  the  expen- 
ditures which  it  would  be  called  upon  to  incur  because  of 
their  presence  in  the  state.  The  second  possibility,  that  of 
allowing  exemption  from  taxation  to  non-residents,  would 
mean  that  New  Yorkers,  working  side  by  side  with  New 
Jerseyites,  would  be  subject  to  taxation  and  the  New 
Jerseyities  would  go  free.  The  third  possible  solution, 
that  of  taxing  residents  on  total  income  and  non-residents 
on  income  derived  within  the  state  seemed  to  the  framers 
of  the  law  the  least  of  the  three  evils.  Injustice  to  non- 
residents who  were  or  became  subject  to  personal  in- 
come taxes  was  guarded  against  by  a  provision  suggested 
by  Professor  Seligman,  by  which  credit  was  allowed  for 
income  taxes  paid  in  other  states  provided  the  other  juris- 
diction granted  similar  credits.1  It  was  held  that  this  solu- 
tion of  the  problem  marked  an  advance  in  the  development 
of  state  income  taxes,  in  line  with  that  of  the  United 
States  and  of  other  important  countries.  The  New  York 
law  went  one  step  ahead  by  allowing  credit  for  taxes  paid 
to  other  jurisdictions.  The  sections  of  the  law  allowing 
to  resident  taxpayers  personal  exemptions  of  $1,000  and 
5^:,ooo  was  framed  on  the  assumption  that  neighboring 
states  would  soon  adopt  income  tax  laws. 

Shortly  after  the  passage  of  the  law  the  fight  against  it 
was  begun  by  non-residents.  The  litigation  was  begun  by 
the  Yale  and  Towne  Manufacturing  Company,  a  Connec- 
ticut corporation  doing  business  in  New  York,  which  con- 
tended that  the  provision  requiring  it  to  pay  to  the  state 
of  New  York  a  portion  of  the  salaries  of  its  employees  who 
were  non-residents  of  the  state  of  New  York  was  uncon- 

1  E.  R.  A.  Seligman,  "  The  New  York  Income  Tax,"  Political  Science 
Quarterly,  vol.  xxxiv,  no.  4  (Dec.  1919),  pp.  536,  537- 


THE  NEW  YORK  INCOME  TAX 

stitutional  and  inconsistent  with  the  "  due  process  of  law  " 
clause  of  the  Fourteenth  Amendment.  Eventually  all 
allegations  but  one  were  disregarded,  and  the  litigation  re- 
volved around  the  question  as  to  whether  the  New  York 
law  was  unconstitutional  in  depriving  non-residents  of  the 
$1,000  and  $2,000  exemptions  allowed  to  unmarried  and 
married  residents  of  New  York.  The  case  was  eventually 
carried  to  the  Supreme  Court  of  the  United  States.  On 
March  i,  1920,  that  court  upheld  the  right  of  the  states 
to  tax  the  incomes  of  non-residents,  but  held  unconsti- 
tutional as  discriminatory  the  provision  of  the  New  York 
law  which  denied  the  personal  exemptions  of  $1,000  and 
$2,000  to  non-residents  while  granting  such  exemptions  to 
residents.1  Justice  Pitney,  in  delivering  the  opinion,  de- 
clared the  law  discriminatory  in  the  following  terms : 

In  the  concrete  the  particular  incident  of  the  discrimination  is 
upon  citizens  of  Connecticut  and  New  Jersey,  neither  of  which 
has  an  income  tax  law.  Whether  they  must  pay  a  tax  upon  the 
first  $1,000  to  $2,000  of  income,  while  their  [New  York]  asso- 
ciates do  not,  makes  a  substantial  difference.  We  are  unable  to 
find  ground  for  the  discrimination,  and  are  constrained  to  hold 
that  it  is  an  unwarranted  denial  to  the  citizens  of  Connecticut 
and  New  Jersey  of  the  privileges  and  immunities  enjoyed  by  the 
citizens  of  New  York. 

The  suggestion  made  by  the  counsel  for  New  York  that 
the  states  affected  might  make  counter  discriminationsi 
against  residents  of  New  York  was  dismissed  with  the  de- 
claration that  "  discrimination  cannot  be  cured  by  retalia- 
tion." 

The  adverse  decision  was  anticipated  by  the  New  York 
officials,  and  an  amendment  was  at  once  introduced  in  the 
legislature  granting  non-residents  the  same  exemptions  as 

1  Eugene  M.  Travis,  Comptroller,  v.  The  Yale  &  Towne  Mfg.  Co.,  U. 
S.  Supreme  'Court,  March  I,  1920. 


STATE  TAXATION  OF  PERSONAL  INCOMES       [124 

those  previously  granted  to  residents.1  In  the  same  legis- 
lative session  the  deductions  allowed  to  non-residents  wer^ 
made  to  correspond  with  those  allowed  to  residents.2  The 
New  York  law  is  now  safeguarded  from  further  attacks 
along  this  line,  'but  the  taxation  of  non-residents  is  still  a 
source  of  active  dissatisfaction  in  the  "  commuting  "  class. 

3.  The  revenue  from  the  tax 

The  proceeds  of  the  tax  on  personal  incomes  were 
counted  upon  to  make  good'  the  deficit  in  the  state's 
revenues  which  would  otherwise  have  resulted  from 
the  enforcement  of  prohibition,  and  at  the  same  time 
to  supplement  the  revenues  of  the  state  and  the  localities 
from  other  sources.  The  tax  has  fulfilled  the  expectations 
of  its  proponents  in  this  respect.  The  rates  as  finally 
adopted,  reaching  a  maximum  of  three  per  cent  on  amounts 
above  $50,000,  were  expected  to  produce  a  tax  yield  of 
$45,ooo,ooo.3  The  yield  of  the  tax  for  the  first  year, 
approximately  $37,000,000,  was  below  the  most  optimisic 
of  the  estimates  made  at  the  time  of  the  passage  of  the  act, 
but  it  exceeded  by  many  millions  any  sum  ever  produced 
by  the  personal  income  tax  in  any  other  state,  and  was  re- 
garded as  a  satisfactory  yield  by  the  state  officials.  More 
than  $22,000,000  was  received  from  New  York  City  alone, 
In  all,  nearly  600,000  residents  of  the  state  paid  taxes  on 
their  incomes,  and  more  than  25,000  non-residents  paid  in- 
come taxes. 

In  accordance  with  the  legal  requirement,  one-half  of 
the  proceeds  of  the  income  tax  were  distributed  to  the  vari- 
ous counties  of  the  state.  More  than  $18.250,000  was 

1  Laws  of  New  York,  1920,  ch.  191. 
1  Laws  of  New  York,  1920,  oh.  693. 

3  Bulletin  of  the  National  Tax:  Association,  vol.  v,  no.  8  (May,  1919) , 
p.  204. 


THE  NEW  YORK  INCOME  TAX 

distributed  in  this  way,  according  to  the  valuation  of  real 
property.  New  York  City's  share  was  $12,469,255.  In 
this  instance  New  York  City  profited  by  its  100  per  cent 
valuation  of  real  property,  and  the  taxpayers  who  were 
accustomed  to  protest  against  their  heavy  assessments  were 
to  some  extent  recompensed  by  the  receipts  from  the  new 
source  of  revenue. 

An  analysis  of  the  federal  income;  tax  returns  for  New 
York  shows  that  the  receipts  from  the  New  York  state  in- 
come tax  for  the  year  1919  were  about  10  per  cent  of  the 
personal  income  taxes  collected  by  the  federal  govern- 
ment in  New  York  in  the  preceding  year.1  New  York  is 
by  far  the  richest  state  in  the  union,  and  is  counted  upon 
by  the  federal  government  to  furnish  about  one-third  of 
the  total  yield  of  the  country's  personal  income  tax.  The 
net  incomes  upon  which  the  taxes  are  paid  in  New  York 
formed  only  about  one-sixth  of  the  total  net  incomes  for 
the  whole  country,  however.  A  comparison  of  these  two 
ratios  indicates  that  a  number  of  very  large  incomes  must 
be  received  in  New  York  state,  and  that  the  very  high 
graduated  rates  of  the  federal  scheme  produce  a  dispropor- 
tionately high  tax  yield  when  applied  to  these  extremely 
large  incomes.  An  income  tax  with  low  rates  and  a  slight 
degree  of  progression,  like  the  state  income  tax,  is  not  ex- 
pected to  produce  such  amounts.  The  state  tax,  which  is 
applied  at  the  uniform  rate  of  three  per  cent  to  all  amounts 
of  income  above  $50,000,  hardly  taps  the  funds  reached  by 
the  high  federal  tax.  New  York  ranks  behind  Wisconsin 
and  Massachusetts  in  the  ratio  of  state  income  tax  re- 
ceipts to  federal  income  tax  receipts,  but  an  attempt  to  gain 
larger  amounts  from  the  New  York  state  tax  is  regarded 
by  tax  experts  as  inadvisable  on  almost  every  count.  New 

1  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  24. 


126       STATE  TAXATION  OF  PERSONAL  INCOMES       [I26 

York  had  40  resident  individuals  with  incomes  of 
$1,000,000  and  over  in  igiS,1  subject  to  a  federal  tax  of 
73  per  cent  on  that  part  of  the  income  in  excess  of 
$1,000,000;  such  incomes,  and  even  those  of  smaller 
amounts,  could  hardly  bear  a  heavy  state  tax  without  con- 
fiscation, an  effect  which  is  not  contemplated  or  desired 
under  the  present  system. 

The  New  York  income  tax  has  already  come  to  play  an 
important  part  in  the  state  revenue.  The  total  revenue 
receipts  of  the  state  for  the  year  ending*  June  30,  1920  were 
$115,591,607,'  of  which  sum  the  income  tax  payments 
made  into  the  state  treasury  were  $16,500,000,  or  approxi- 
mately one-seventh.  If  the  entire  proceeds  of  the  income 
tax  had  been  assigned  to  the  state  about  one-fourth  of  the 
state  revenues  would  have  come  from  taxes  on  personal 
incomes.  The  income  tax  proved  to  be  unexpectedly  pro- 
ductive, and  at  the  close  of  the  fiscal  year  the  income  tax 
bureau  held  undistributed  the  sum  of  $1,700,000.  An  un- 
fortunate tendency  has  developed  to  regard  the  state's  share 
of  the  income  tax  as  a  surplus,  for  the  proceeds  are  not  as- 
signed to  any  particular  purpose. 

The  cost  of  administration  of  the  New  York  tax  for  the 
Orst  year  was  approximately  $1,000,000,  or  between  two 
and  three  per  cent  of  the  amount  collected.  The  cost  of 
organizing  and  installing  an  administrative  bureau  must  of 
course  be  unusually  large  during  the  first  year,  and  this 
figure  may  be  expected  to  show  an  appreciable  decrease. 
During  1920  the  income  tax  office  handled  8*26,000  returns, 
so  that  the  cost  of  collection  as  related  to  the  number  of 
returns  was  a  little  more  than  a  dollar  for  each  return. 
The  work  of  an  income  tax  office  is  divided  into  two  parts. 

1  United  States  Internal  Revenue,  Statistics  of  Income  for  1918,  p.  67. 
1  New  York  Comptroller,  Report,  1920,  p.  xiii. 


I2;]  THE  NEW  YORK  INCOME  TAX 

During  the  first  part  of  the  year  the  office  handles  the  volun- 
tary payments,  and  during  the  remaining  months  delin- 
quent payments  and  understatements  are  cared  for. 
Viewed  in  this  way,  the  New  York  income  tax  bureau  may 
be  said  to  have  collected  $36,250,000  in  voluntary  payments 
at  a  cost  to  the  state  of  only  $250,000,  and  to  have  sustained 
itself,  approximately,  during  the  rest  of  the  year.1  The 
voluntary  collections  were  made  at  a  cost  of  less  than  one 
per  cent. 

4.   Unsettled  questions 

The  adoption  of  a  personal  income  tax  law  by  the  state 
of  New  York  is  an  event  hardly  to  be  overstimated  in 
the  history  of  state  income  taxes.  The  experiment  begun 
in  Wisconsin  eight  years  before,  significant  as  it  was,  could 
not  settle  the  question  of  the  suitability  of  the  income  tax 
to  a  highly  organized  industrial  and  commercial  area,  for 
Wisconsin  stands  far  down  on  the  list  of  manufacturing 
states.  The  experience  of  Massachusetts  was  more  signi- 
ficant in  pointing  out  the  way  in  which  the  income  tax  can 
be  adapted  to  an  increasingly  complex  economic  organiza- 
tion, but  the  Massachusetts  tax  was  not  a  general  income 
tax,  and,  in  the  second  place,  Massachusetts,  rich  as  it  is, 
holds  only  one-third  of  the  taxable  income  contained  in 
New  York.  When  New  York  itself,  the  richest  state  in 
the  union  on  almost  all  counts,  and  the  source  of  a  third  of 
the  federal  income  taxes,  succeeds  in  installing  a  workable 
income  tax  system  and  in  obtaining  a  sum  equivalent  to 
more  than  one- fourth  of  the  state  revenues  from  taxes  on 
personal  incomes,  the  revenue-yielding  capacity  of  income 
taxes  can  no  longer  be  called  into  question.  Improvements 
in  the  plan  of  taxation  itself  and  in  the  administrative 

1  Information  furnished  by  New  York  Income  Tax  Director  Jan.  14, 
1921. 


I28        STATE  TAXATION  OF  PERSONAL  INCOMES       [I2g 

machinery  involved  will  undoubtedly  be  made;  the  tax  itself 
may  give  way  to  other  forms  of  taxes  as  revenue  needs 
change  and  the  social  structure  is  modified;  but  the  one 
almo'st  universal  count  against  the  personal  income  tax  as 
affairs  stood  in  1911,  that  of  a  failure  to  produce  revenue, 
has  ceased  to  exist.  Curiously  enough,  one  of  the  income 
tax  problems  which  seems  likely  to  be  serious  is  its  over- 
pro  ductiveness ,  and  the  consequent  temptation  to  extrava- 
gance which  surplus  revenues  always  produce. 

The  dimensions  of  the  income  tax  system  in  New  York 
intensify  the  problems  which  have  arisen  in  connection  with 
other  state  income  taxes  but  which  have  sometimes  been 
overlooked.  The  New  York  plan  of  tax  rates,  for  ex- 
ample, (that  of  a  graduated  tax  which  reaches  a  maximum 
at  three  per  cent  on  taxable  incomes  oi  more  than  $50,000) 
remains  to  be  tested.  During  the  first  year  of  its  opera- 
tion, when  the  federal  tax  rates  reached  a  maximum  of  73 
per  cent,  it  appeared  to  be  well  suited  to  the  whole  tax  situa- 
tion. If  the  projected  reduction  of  the  federal  surtax 
rates  is  brought  about,  should  the  New  York  tax  rates  be? 
raised?  Or  should  they  be  lowered  for  the  same  reasons 
which  are  urged  for  the  reduction  of  the  federal  rates,  and 
such  a  flat  rate  as  that  of  the  two  per  cent  originally  planned 
for  New  York  be  substituted?  The  productiveness  of  the 
tax  in  a  few  given  years  is  not  the  only  factor  to  be  con- 
sidered; the  effect  of  the  tax  payments  upon  the  status  of 
large  incomes  and  the  domiciles  of  their  recipients,  together 
with  many  less  definable  social  effects,  must  also  be  taken 
into  account.  Should  a  distinction  be  made  between  earned 
and  unearned  income  for  the  purposes  of  taxation?  Un- 
earned or  "  investment "  incomes  are  probably  received  in 
larger  amounts  in  New  York  than  in  any  other  state.  One 
of  the  early  advocates  of  the  New  York  tax  believes  that 
such  a  distinction  should  have  been  made,  at  least  for  the 


THE  NEW  YORK  INCOME  TAX 

lower  stages  of  income,  since  the  heavier  rates  which  in 
practice  apply  principally  to  incomes  derived  in  considerable 
part  from  property  do  not  affect  these  incomes.1  Should 
the  exemption  of  intangible  property  have  been  accompan- 
ied by  the  exemption  of  tangible  property?  The  same 
authority  holds  that  the  present  practice  of  exempting  tang- 
ible property  should  have  been  made  a  legal  practice. 

The  questions  involved  in  the  taxation  of  non-residents 
are  only  partially  settled.  Now  that  non-residents  of  New 
York  are  allowed  exemptions  similar  to  those  of  residents, 
the  right  of  the  state  to  apply  the  tax  in  its  present  form  to 
the  income  of  non-residents  appears  to  be  established.  The 
United  States  Supreme  Court  decision  in  the  case  of  the 
taxation  of  non-residents  by  Oklahoma2  established  the 
dominion  of  the  states  over  the  persons,  property  and 
business  within  their  borders,  the  right  of  the  states  to  levy 
taxes  upon  the  incomes  of  non-residents  from  property  or 
business  within  the  state,  and  the  right  of  the  states  to  en- 
force the  payment  of  such  taxes  by  the  exercise  of  their 
control  over  the  property  within  their  borders.  This  right 
of  taxation  has  been  constructed  to  apply  to  the  income  of 
non-resident  exporters  whose  business  offices  are  in  the 
state  of  New  York,  on  the  ground  that  the  tax  is  upon  net 
income  derived  from  conducting  business  in  New  York 
and  not  upon  business  itself.8  The  fact  that  such  tax- 
payers' homes  are  outside  New  York  bears  directly  upon 
the  question  of  enforcing  tax  payment,  but  not  upon  the 
right  of  the  state  to  assess  the  income  tax  in  such  cases. 

Thus  far,  then,  the  state's  right  to  tax  the  incomes  of 

1  Seligman,  op.  cit.,  p.  542. 

a  Charles  B.  Shaffer  v.  'Frank  C.  Carter,  State  Auditor,  and  Abner 
Bruce,  Sheriff  of  Creek  County,  Oklahoma,  U.  S.  Supreme  Court, 
March  i,  1920. 

8  New  York  Times,  March  12,  1921. 


STATE  TAXATION  OF  PERSONAL  INCOMES        [130 

non-residents,  if  no  discrimination  is  involved,  is  clear  as 
matters  stand  at  present.  The  wisdom  of  making  the  at- 
tempt is  more  questionable.  Mr.  Holcomb,  secretary  of 
the  National  Tax  Association,  concludes  a  review  of  the 
Oklahoma  and  New  York  decisions  with  the  following 
words:1 

The  reviewer  looks  with  no  little  concern  upon  the  whole  problem 
of  non-resident  income  taxation,  not  only  because  of  its  doubtful 
expediency,  but  more  because  of  his  inability  to  see  how  a  fair, 
thorough  and  effective  system  of  collection  is  to  be  obtained.  The 
difficulties  of  enforcing  tax  warrants  for  personal  taxes  against 
non-residents  have  long  been  recognized  by  the  New  York  courts. 
...  If  we  are  to  have  a  repetition  of  the  farce  with  respect  to 
non-resident  income  taxes  which  has  obtained  with  respect  to 
property  taxes,  it  would  appear  altogether  better  to  resort  to 
some  other  form  of  business  taxes.  .  .  . 

The  Committee  on  Model  Taxation  also  advocates  the 
taxation  of  residents  only,  on  the  ground  that  the  income 
tax  is  properly  a  tax  upon  persons  only,  to  be  collected  at 
places  where  they  are  domiciled,  and  not  upon  business; 
and  that  a  well-constructed  system  of  taxation  involves 
taxing  business  and  property  located  within  a  state  by 
other  means,  so  that  such  business  and  property  can  in  n.) 
wise  be  regarded  as  escaping  taxation.  Professor  Bullock, 
the  chairman  of  the  Committee  on  Model  Taxation,  stated 
that  "  from  the  theoretical  point  o<f  view  the  New  York 
law  as  it  stands,  is  bad,  except  for  this  saving  clause  by 
which  it  recognizes  the  right  of  other  states  to  step  in  and 
levy  personal  income  taxes  without  doubly  taxing."  In 
spite  of  the  opposition  on  theoretical  grounds,  the  taxation 
of  non-residents  still  has  warm  support  from  within  the 

1  Bulletin  of  the  National  Tax  Association,  vol.  v,   no.  6    (March, 
1920),  p.  183. 
1  Proceedings  of  the  National  Tax  Association,  1919,  p.  406. 


THE  NEW  YORK  INCOME  TAX 

state,  and  the  final  solution  of  the  problem  waits  for  further 
evidence. 

Still  another  question  which  is  yet  to  be  worked  out  in 
New  York  is  that  of  collection  at  the  source  of  taxes  on 
the  incomes  of  non-residents.  The  main  argument  for  the 
use  of  the  method  is  the  incontrovertible  one  that  it  is  the 
only  really  effective  means  of  obtaining  taxes  due  from  per- 
sons resident  outside  of  the  state.  In  the  Yale  and  Towne 
case,  whch  had  its  origin  in  the  refusal  of  a  withholding 
agent  to  withhold  the  percentage  of  payments  made  to  its 
employees  which  the  New  York  income  tax  law  specified, 
it  was  held  that  the  right  of  the  state  to  impose  a  tax  upon 
the  incomes  of  non-residents  arising  from  business  or  oc- 
cupations carried  on  within  its  borders  carried  with  it  the 
right  to  enforce  payment  "  so  far  as  it  can  by  the  exercise  of 
a  just  control  over  persons  and  property  within  the  state, 
as  by  garnishment  of  credits  (of  which  the  withholding 
provision  of  the  New  York  law  is  the  practical  equiva- 
lent)." *  It  was  held  that  in  the  case  of  non-residents  the 
state  merely  adopted  a  convenient  substitute  for  the  per- 
sonal liability  which  it  could  not  impose.  It  was  also  held 
that  the  burden  imposed  upon  the  withholding  agent  was 
not  an  unjust  one  and  not  an  unreasonable  regulation  of  the 
conduct  of  business  within  the  state. 

The  question  of  collection  at  the  source  is  linked  up  with 
the  taxation  of  non-residents  so  closely  that  if  the  latter 
goes  the  former  goes  with  it.  The  experience  of  the  state 
of  New  York  ought  to  furnish  a  conclusive  demonstration 
of  the  practicability  of  the  method.  Meanwhile  many  cri- 
tics remain  as  sceptical  of  the  ultimate  success  of  the  means 
as  of  the  permanent  value  of  the  non-resident  taxation 
itself. 

1  Bulletin  of  the  National  Tax  Association,  vol.  v,  no.  6  (March, 
1920),  p.  183. 


STATE  TAXATION  OF  PERSONAL  INCOMES       [132 

In  the  collection  of  a  tax  of  the  dimensions  of  the  New 
York  income  tax,  questions  which  are  in  the  last  analysis 
questions  of  the  accounting  methods  sanctioned  by  the 
state  loom  up  in  great  importance.  In  March,  1921,  such 
a  question  presented  itself,  at  the  very  time  when  income 
tax  computations  were  being  made.  The  question  arose  in 
connection  with  the  assessment  of  federal  income  taxes. 
When  Solicitor  General  Frierson  announced  that  excess 
realized  011  the  sale  of  stocks  was  no  longer  to  be  consid- 
ered as  constituting  taxable  income  under  the  federal  law, 
— a  decision  which  was  announced  to  the  United  States. 
Supreme  Court  in  connection  with  the  case  of  Goodrich  vs. 
Edwards, — taxpayers  under  the  New  York  income  tax  law 
were  thrown  into  confusion.  The  New  York  income  tax 
bureau,  which  had  followed  the  policy  of  levying  against 
payers  of  the  income  tax  on  any  excess  realized  on  the  sale 
of  stocks  and  bonds,  at  once  announced  that  it  would  con- 
tinue its  former  policy,  and  would  not  interpret  section  353 
of  the  state  law  in  the  way  in  which  the  federal  law  was  to 
be  interpreted  according  to  the  new  decision.  The  diffi- 
culty which  was  immediately  emphasized  by  the  opponents 
of  the  state's  policy  was  the  fact  that  when  a  tax  is  levied 
on  the  excess  realized  from  the  sale  of  stocks  above  the 
market  value  on  January  i,  1919,  when  the  state  income 
tax  law  became  effective,  the  taxpayer  may  have  incurred 
an  actual  loss  in  the  transaction,  on  account  of  the  price 
paid  in  purchase  before  January  i,  1919.  At  the  time  the 
above  decision  was  announced  the  case  of  the  People  ex 
rel.  Edward  Klauber,  a  New  York  lace  manufacturer, 
against  Comptroller  James  A.  Wendell,  was  being  heard  in 
the  Appellate  Division  at  Albany.  The  case  was  similar  to 
that  of  the  Goodrich  case  in  the  United  State  Supreme 
Court,  and  the  position  taken  by  the  counsel  for  Mr. 
Klauber  was  that  the  state  must  confine  its  tax  to  income 


J33]  THE  NEW  YORK  INCOME  TAX 

and  that  it  lacks  the  power  to  turn  a  loss  into  a  theoretical 
profit.  The  decision  was  expected  in  May,  1921,  and  the 
case  was  to  be  taken  before  the  Court  oi  Appeals  in  the 
following  month. 

After  the  federal  decision  the  state  policy  was  attacked 
with  increasing  vigor,  and  the  director  of  the  income  tax 
bureau  announced  that  he  had  laid  the  matter  before  the 
senate  and  assembly  tax  committees  with  the  suggestion 
that  a  change  in  the  state  income  tax  law  should  be  conr 
sidered.  The  provision  had  been  condemned  as  "  unduly 
harsh  "  by  the  committee  on  model  taxation,  with  whom 
the  director  had  conferred.  The  model  tax  committee 
suggested  the  use  of  a  rule  by  which  the  taxpayer  is  given 
the  benefit  of  the  higher  of  two  estimates  at  the  date  of  the 
tax, — basis  cost  or  market  value.  In  the  meantime,  the 
director  reminded  the  taxpayers,  the  income  tax  bureau  had 
no  choice  but  to  administer  the  law  is  it  stood. 

Later  in  the:  same  month  the  United  States  Supreme 
Court  announced  a  decision  establishing  the  rule  that  un- 
less a  given  transaction  which  was  completed  prior  to  the 
basic  date  for  computation  prescribed  in  the  federal  law 
resulted  in  an  actual  gain,  no  "  income  "  could  result.  It 
then  became  a  more  urgent  question  as  to  whether  the  state 
of  New  York  could  continue  to  maintain  its  stand  with  re- 
gard to  January,  1919,  values,  for  although  the  state  is  not 
hedged  about  by  the  same  constitutional  limitations,  the 
aim  and  methods  of  the  laws  should  be  as  consistent  as 
possible. 

In  May,  1921,  two  events  occurred  which  tended  to  clear 
up  the  matter.  The  Third  Appellate  Division  handed 
down  decisions  denying  the  right  oi  the  state  to  tax  stocks 
sold  at  a  loss,  and  a  bill  was  signed  which  changed  the 
method  of  computing  profit  and  loss,  with  the  intention  of 
doing  away  with  the  injustice  which  the  older  method  had 


134 


STATE  TAXATION  OF  PERSONAL  INCOMES 


[J34 


produced.  It  was  expected  that  the  construction  of  the 
state  law  in  the  cases  not  covered  by  the  ruling  of  the  court 
would  still  present  troublesome  complications.  The  situa- 
tion illustrates  the  difficulties  of  the  administration  of  the 
income  'tax  in  highly  developed  financial  communities. 

The  distribution  of  the  proceeds  of  the  income  tax  to  the 
local  units  is  not  yet  universally  approved,  and  the  parti- 
cular scheme  of  distribution  adopted  by  New  York,  that  of 
dividing  the  proceeds  of  the  income  tax  among  the  counties 
according  to  assessed  valuation,  has  few  supporters.  Dis- 
tribution according  to  educational  needs  seems  to  be  com- 
ing ino  favor,  and  if  New  York  is  not  to  lag  behind  the 
rest  of  the  country  in  this  matter  it  should  give  further  con- 
sideration to  the  possibilities  of  such  a  plan.  The  possible 
over-productiveness  O'f  the  income  tax  in  New  York  has 
already  been  referrel  to.  Coupled  with  the  program  of 
economy  undertaken  early  in  192-1,  the  great  productive- 
ness oi  the  tax  may  bring  about  unforeseen  problems  if  a 
more  careful  plan  of  distribution  is  not  made. 

Finally,  New  York  has  not  yet  come  to  know  its  own 
mind  with  respect  to  the  administration  of  the  income  tax. 
When  the  law  was  passed  in  1919  the  usual  functions  of 
the  state  tax  commission  were  disregarded,  and  the  work 
given  to  the  state  comptroller,  although  the  state  tax  com- 
mission continued  to  administer  the  corporation  taxes.  In 
the  following  two  years  an  extensive1  organization  was 
built  up  and  large  sums  collected  with  a  fair  degree  of 
economy.  Suddenly,  in  1921,  the  state  tax  commission  was 
organized  and  awarded  the  tax-collecting  powers  of  the 
comptroller  and  the  secretary  of  state.  The  type  of  organ- 
ization of  tax  functions  is  in  accord  with  the  best  modern 
opinion  and  with  the  recommendations  of  the  committee 
on  model  taxation,  but  it  is  probable  that  the  state  will  en- 
counter temporary  difficulties  in  making  the  change. 


THE  NEW  YORK  INCOME  TAX 

It  was  not  to  be  expected,  even  with  the  wealth  of  ex- 
pert assistance  which  was  at  hand  while  the  New  York  in- 
come tax  law  was  being  worked  out,  that  a  perfect  system 
could  be  evolved  in  the  first  year.  It  is  in  fact  remarkable 
that  a  fiscal  device  which  was  in  general  disrepute  as  a  state 
measure  less  than  ten  years  before  could  have  been  made  a 
uniquely  productive  source  of  revenue,  and  that  it  could 
have  been  employed  without  active  opposition  and  other 
undesirable  social  and  political  consequences.  The  ques- 
tions which  remain  in  part  unsettled, — the  rates  of  the  tax 
in  relation  to  the  federal  rates,  the  various  aspects  of  the 
taxation  O'f  non-residents  and  the  collection  of  those  taxes, 
the  distribution  of  the  yield,  the  best  type  of  general  and 
local  administration  o<f  the  tax  as  it  is  used  in  New  York, 
and  other  more  evanescent  questions  of  the  proper  com- 
putation of  the  taxes, — are  in  fact,  important  as  they  are  in 
bringing  about  justice  and  fairness  in  taxation,  matters 
which  are  minor  in  importance  when  the  great  fact  of  the 
acceptance  of  the  income  tax  by  the  public  is  given  its 
proper  place.  If  an  increasingly  skillful  use  is  made  of 
this  means  of  taxation,  New  York  will  be-  enabled  to  oc- 
cupy a  place  of  as  great  significance  in  the  field  of  tax  laws 
and  administration  as  it  already  does  in  the  field  of  business 
finance.  , 


CHAPTER  VIII 
THE  NORTH  DAKOTA  INCOME  TAX 

}  i.  The  income  tax:  law  of  ipip 

NORTH  DAKOTA,  one  of  the  newer  states,  made  few  signi- 
ficant contributions  to  taxation  history  until  recently.  In 
1919,  however,  largely  as  a  result  of  the  influence  of  the 
Non-Partisan  League  in  the  state,  the  legislature  carried 
through  an  extensive  program  of  changes  in  the  tax  and 
revenue  code  which  included  the  inauguration  of  an  in-? 
come  tax  along  unusual  lines.  At  the  same  time  provision 
was  made  for  several  state  industrial  undertakngs.  The 
impelling  motive  for  the  adoption  of  an  income  tax  law 
seemed  to  be  not  so  much  the  usual  accumulation  of  dis- 
satisfaction with  the  operation  of  the  personal  property  tax 
along  particular  lines  as  a  conviction  among  the  legislators 
that  the  existing  scheme  of  taxation  exacted  contributions 
for  the  support  of  the  state  from  the  wrong  people, — those 
not  best  able  to  contribute.  As  a  result  the  effort  was  made 
to  obtain  more  revenue  from  the  richest  individuals  and 
those  who  were  the  recipients  of  "  unearned  "  income. 

The  income  tax  law  passed  in  I9I9,1  therefore,  made  a 
distinction  between  "earned  "  and  "  unearned  "  income  and 
imposed  a  doubly  heavy  progressive  rate  on  unearned  in- 
come up  to  $12,000  at  which  point  the  two  sets  of  ratesi 
begin  to  converge.  The  law  applied  the  tax  to  the  income 
of  both  residents  and  non-residents,2  from  all  sources  within 

1  Laws  of  North  Dakota,  1919,  ch.  23. 

2  Income  of  non-residents  from  personal  services  and  intangibles  was 
exempt. 

136  [136 


J37]  THE  NORTH  DAKOTA  INCOME  TAX 

the  state.  The  personal  exemptions  were  $1,000  for  the 
individual,  $2,000  for  the  head  o>f  a  family,  and  $200  ad^ 
ditional  for  each  dependent  person  above  the  number  of 
one.  Deductions  for  ordinary  business  expenses,  losses, 
bad  debts,  depreciation,  interest  on  indebtedness,  and 
taxes  were  allowed.  Personal  property  tax  receipts  were 
allowed  as  offsets.  Collection  at  the  source  of  interest, 
dividends,  profits,  premiums,  and  annuities  was  provided 
for,  but  this  provision  was  later  repealed.  The  proceeds 
were  to  defray  the  general  expenses  of  the  state  govern- 
ment. 

The  type  of  administration  provided  for  was  along  the 
lines  which  have  proved  most  successful  in  recent  years. 
The  tax  commissioner  was  given  the  supervision  of  the 
system  and  was  authorized  to  divide  the  state  into  income 
tax  districts  and  to  appoint  special  assessors  of  income,  al- 
though he  might  "  appoint  an  existing  tax  officer  to  act  as 
such  income  tax  assessor." 

The  scale  of  taxation  of  incomes  was  as  follows : 


Net  income 

Rate 

(per  cent) 

Earned  income 

Unearned  income 

ist  $1,000  

25 

-5 

2nd    1,000  

5 

I. 

3rd    1,000  

75 

1-5 

4th    1,000  

i. 

2. 

5th    1,000  

1.25 

2-5 

6th    1,000  

1.5 

3- 

7th    1,000  

1.75 

3-5 

8th    1,000  

2. 

4- 

9th    1,000  

2.25 

4-5 

loth    1,000  

2.5 

5- 

nth    1,000  

2.75 

6. 

I2th      I,OOO    

3- 

6. 

I3th    1,000  

3-25 

6. 

i4th    1,000  

3-5 

6. 

I5th    1,000  

375 

6. 

i6th    1,000  

4- 

6. 

STATE  TAXATION  OF  PERSONAL  INCOMES        [^g 

I7th  1,000  4.25  6. 

i8th  1,000  4.5  0. 

ipth  1,000  4.75  6. 

2Oth  1,000  5.  6. 

In  excess  of  $20,000  and  not  in 

excess  of  $30,000 6.  8. 

In  excess  of  $30,000  and  not  in 

excess  of  $40,000 8.  10. 

In  excess  of  $40,000 10.  10. 

A  corporation  income  tax  imposed  under  the  same  law 
was  levied  at  the  rate  of  three  per  cent  on  net  inc  me,  plus 
five  per  cent  of  any  amount  undistributed  six  months  after 
the  end  of  the  fiscal  year. 

2.  Criticisms  of  the  law  of  ipip 

Critical  comment  on  the  act  of  1919  has  been  general. 
Not  only  was  the  discrimination  between  earned  and  un- 
earned incomes  by  means  of  a  graduated  tax  with  doubled 
rates  on  the  unearned  income  an  innovation  in  this  country, 
but  the  maximum  rates  of  taxation  (10  per  cent)  were  un- 
precedented in  state  income  taxation.  Such  a  plan  of  tax- 
ation has  been  usually  regarded  as  more  suitable  for  a  highly 
developed  community,  with  large  incomes  and  vested  in- 
terests of  long  standing,  than  for  a  community  in  which 
industrial  and  commercial  affairs  are  in  an  almost  pioneer 
stage.  The  whole  body  of  legislation  enacted  in  the  ses- 
sion O'f  1919  was  apparently  the  work  of  a  body  of  legisla- 
tors determined  to  place  so-called  "  capitalistic  "  activities 
at  a  disadvantage,  and  significantly,  appears  as  The  New 
Day  in  North  Dakota:  Some  of  the  Principal  Laws  enacted 
by  the  Sixteenth  Legislative  Assembly,  /pip,  the  compila- 
tion of  laws  of  that  year  published  by  the  state -industrial 
commission.  Much  of  the  fiscal  legislation  be-ars  the  mark 
of  this  intention  rather  than  of  the  results  of  a  careful 
analysis  of  the  financial  situation  of  North  Dakota. 


*39]  THE  NORTH  DAKOTA  INCOME  TAX 

Collection  at  the  source  involves  many  problems  which 
have  already  hampered  the  authorities.1 

This  system  of  collection  must  involve  tremendous  administrative 
difficulties  and  complications,  for  the  withholding  agents  are  re- 
quired to  deduct  from  each  payment  of  interest,  dividends,  or 
other  form  of  taxable  income,  such  part  as  will  be  required  to  pay 
the  tax,  and  there  axe  no  less  than  twenty-three  different  rates  any 
one  of  which  may  be  the  proper  one  in  a  given  case. 

Furthermore,  double  taxation,  produced  in  this  case  by 
requiring  the  taxation  of  dividends  as  unearned  income  but 
permitting  no  deductions  to  the  individual  for  taxes  paid 
by  corporations  subject  to  the  act  frequently  has  undesirable 
results. 

The  defects  in  the  act  of  1919  which  became  apparent 
almost  immediately  had  to  do  with  the  scale  of  rates  and 
the  differentiation  between  earned  and  unearned  incomes. 
The  income  tax  was  apparently  constructed  with  the  inten- 
tion of  promoting  social  justice  through  the  medium  of  com- 
pulsory contributions  to  the  expenses  of  the  state.  The 
incomes  of  the  wealthy  were  to  be  drawn  upon  for  large 
amounts,  in  a  proportion  almost  unparalleled  in  the  history 
of  the  state  taxation  of  incomes,  while  only  nominal  sums 
were  to  be  exacted  from  the  persons  in  receipt  of  small  in- 
comes. When  the  primary  rates  of  the  North  Dakota  act 
(one- fourth  of  one  per  cent  on  the  first  $1,000  of  taxable 
earned  income  and  one-half  of  one  per  cent  on  the  cor- 
responding category  of  unearned  income)  were  devised, 
several  signs  of  the  times  were  already  pointing  out  a  safe 
course  for  state  income  taxes  which  should  probably  have 
been  heeded  in  North  Dakota.  The  committee  on  a  model 
system  of  state  and  local  taxation  appointed  by  the  National 

1  H.  L.  Lutz,  "  The  Progress  of  State  Taxation  since  1911,"  American 
Economic  Review,  vol.  x,  no.  I  (March,  1920),  p.  73. 


I4o        STATE  TAXATION  OF  PERSONAL  INCOMES 

Tax  Association  had  already  reported  against  a  smaller 
initial  rate  than  one  per  cent.  The  expense  of  collecting 
small  tax  bills  due  from  persons  with  low  incomes  had 
already  received  attention  in  states  where  the  income  tax: 
seemed  a  doubtful  success,  and  changes  were  imminent. 
Furthermore,  for  the  first  time  the  actual  status  of  indi- 
viduals with  respect  to  their  incomes  was  becoming  a  matter 
of  common  knowledge,  through  the  operation  of  the 
federal  income  tax  and  the  publication  of  Statistics  of  In- 
come by  the  United  States  Internal  Revenue.  A  cursory 
examination  of  the  published  figures  would  have  shown  that 
the  tax-paying  capacity  of  North  Dakota  incomes  was  ex- 
ceedingly small,  both  absolutely  and  relatively,  and  that  such 
a  tax  as  that  provided  for  in  1919  might  be  expected  to 
yield  only  a  small  amount  and  to  be  expensive  to  admin- 
ister. 

The  federal  income  taxes  received  in  1917  from  North 
Dakota  incomes  in  1916  amounted  to  only  five-hundred ths 
of  one  per  cent  of  the  personal  income  taxes  collected  in 
the  country  as  a  whole.1  The  tax  itself  amounted  to 
$66,344,  and  the  number  of  individuals  making  returns  was 
1,176.  The  federal  tax  for  the  year  1916  applied  to  in- 
comen  of  $3,000  and  over  ($4,000  in  the  case  of  married 
persons)  and  was  imposed  at  the  normal  rate  of  two  per 
cent,  with  surtaxes  reaching  13  per  cent  on  the  largest  in- 
comes. It  should  have  been  clear  that  little  return  was  to 
be  expected  from  the  state  tax  on  large  incomes.  For  the 
incomes  of  the  year  1917,  when  the  federal  tax  reached 
down  to  incomes  o»f  $1,000,  the  number  of  returns  from 
North  Dakota  increased  by  nearly  20,000.  But  earned  in- 
comes of  $4,000  and  less  were  taxed  at  less  than  one  per 
cent  in  North  Dakota.  The  majority,  presumably,  were 

1  United  States  Internal  Revenue,  Statistics  of  Income  for  1917,  pp. 
8,  II. 


141  ]  THE  NORTH  DAKOTA  INCOME  TAX 

taxed  at  one-fourth  of  one  per  cent,  as  the  number  in  re- 
ceipt of  incomes  of  $1,000  but  less  than  $2,000  has  always 
proved  to  be  larger  than  that  contained  in  any  other  classi- 
fication oi  similar  size.  The  yield  of  the  North  Dakota 
tax  was  plainly  destined  to  be  small,  as  the  large  incomes 
were  too  scarce  to  produce  much  revenue  and  the  small  in- 
incomes  were  inadequately  taxed. 

A  difficult  aspect  of  the  differentiation  soon  presented 
itself.  The  tax  on  unearned  incomes  failed  to  prove  a 
productive  source  of  revenue,  not  only  'because  the  large 
incomes  were  so  few  in  number,  but  because  the  rates  were 
so  fixed  that  in  many  instances  the  tax  yield  of  incomes  was 
smaller  than  if  a  simple  scale  applicable  to  all  incomes  alike 
had  been  in  force.  The  state  tax  department  early  recog- 
nized the  difficulty,  and  made  plans  for  recommending  a 
change  at  the  earliest  possible  time.  The  department  des- 
cribes the  situation  as  follows : * 

Our  experience  with  the  earned  and  unearned  feature  of  the  law 
has  shown  us  that,  in  this  state  at  least,  such  classification  is  with- 
out value.  .  .  .  The  purpose  of  taxing  the  unearned  income  at  a 
higher  rate  is  to  make  such  classes  of  income  bear  a  larger  pro- 
portion of  the  burden  of  income  taxation.  Our  law  has  not  accom- 
plished this  result  for  the  reason  that  we  find  in  this  state  prac- 
tically all  individuals  have  as  much,  if  not  more,  earned  income 
than  unearned  income.  Therefore,  since  our  rates  start  at  the 
primary  rates  in  both  instances,  our  present  law  results  in  less 
revenue  than  if  we  taxed  the  entire  income  of  all  individuals  at 
the  earned  rate. 

An  example  of  the  working  of  the  law  of  1919  in  this  re- 
spect is  furnished  by  the  return  of  an  individual  taxpayer 
with  $20,000  earned  income  and  $1,000  unearned  income. 
Under  the  provisions  of  the  law,  the  rate  on  the  twentieth 
thousand  of  earned  incomes  is  5  per  cent.  The  rate  on  the 

1  North  Dakota  Tax  Department,  Statement,  July,  1920. 


I42        STATE  TAXATION  OF  PERSONAL  INCOMES        [I42 

thousand  of  unearned  income  (classified  as  the  first  thousand 
of  unearned  income)  is  one-half  o-f  one  per  cent.  But  if 
the  same  individual  had  an  income  of  $21,000  all  earned, 
the  rate  on  the  additional  thousand  (the  twenty-first  thous- 
and O'f  earned  income)  would  be  six  per  cent.  Conse- 
quently the  state  loses,  by  this  classification,  the  difference 
between  a  tax  oi  six  per  cent  on  the  additional  thousand 
and  a  tax  of  one-half  of  one  per  cent  on  that  amount. 

The  individual  who  pays  taxes  on  earned  income  is  dis- 
criminated against  in  another  way,  in  respect  to  increases 
in  the  rate  of  his  tax.  One  critic  described  the  situation 
as  follows :  * 

The  rates  applying  to  the  two  classes  of  income  are  elaborately 
and,  in  the  writer's  judgment,  uselessly  graduated.  .  .  .  The  rates 
rise  steadily  for  both  classes  of  income,  and  the  total  tax  burden 
on  given  amounts  of  the  two  classes  of  income  presents  the  sin- 
gular phenomenon  of  a  heavier  rate  of  increase  on  the  earned  in- 
comes than  on  the  unearned.  .  .  .  The  increases  of  taxes  for  the 
third  $10,000  of  earned  income  over  the  second  $10,000  is  54.8 
per  cent,  while  for  the  same  amount  of  unearned  income  it  is  ... 
33^3  per  cent.  This  discrepancy  was  hardly  intended  and  was 
produced  by  introducing,  after  $10,000,  much  larger  income 
brackets  for  unearned  income,  while  the  minute  graduation  of  rate 
for  earned  income  was  continued  through  $20,000  of  income. 

3.  The  operation  of  the  income  iax  law 

The  amount  of  the  income  tax  certified  to  the  North 
Dakota  state  treasurer  for  collection  up  to  October  i, 
1920,  was  $53,887.  During  the  same  year  the  operation 
of  the  corporation  income  tax,  which  yielded  approximately 
$460,000,  was  regarded  as  satisfactory.  The  explanation 
of  the  small  amount  of  income  assessed  against  individuals 

i  Lutz,  op.  cit.,  p.  73- 


143]  '1HE  NORTH  DAKOTA  INCOME  TAX 

is  given  as  follows  in  the  report  of  the  state  tax  commis- 
sioner :  ' 

1.  inc  me  fixm  mortgages  secured  on  North  Dakota  pro- 
perty and  income  from  North  Dakota  bank  deposits 
were  exempt. 

2.  Dividends    received    in    1919    earned    in    1918   were 
exempt. 

3.  Cnp  failures  in  1919  reduced  the  incomes  of  both 
farmers  and  business  men, 

4.  There  are  few  large  incomes  in  North  Dakota,  and  the 
perse  nal  property  tax  offset  operated  to  reduce  the 
yield  from  that  part  of  the  tax. 

5.  The  rates  on  individual  incomes  are  "  absurdly  low." 

6.  A  large  proportion  of  the  individuals  with  large  in- 
comes claimed  deductions  for  taxes  paid  on  national 
bank  st  ck. 

7.  The  classification  of  earned  and  unearned  income  has 
involved  a  loss  of  revenue. 

The  tax  commissioner's  comment  on  the  failure  of  the 
present  income  tax  system  is  as  follows : 2 

The  personal  income  tax  law  has  proven  a  failure  as  a  revenue 
producer.  The  larger  part  of  the  cost  of  administration  of  our 
income  tax  law  is  chargeable  to  the  administration  of  the  personal 
income  tax.  More  than  eighteen  thousand  personal  income  tax 
reports  were  received  from  individuals,  and  over  four  thousand 
were  received  from  corporations.  The  larger  part  of  the  corpora- 
tions were  taxable.  A  large  majority  of  individuals  making  an 
income  tax  report  paid  only  a  very  small  tax  or  were  exempt.  It 
is  very  probable  that  if  all  of  the  reporting  taxpayers  had  been 
thoroughly  conversant  with  our  income  tax  law  and  with  the 
various  exemptions  and  deductions  allowable  under  said  law,  that 
we  could  not  have  secured  nearly  as  large  an  amount  of  revenue 
as  was  secured.  .  .  . 

1  North  Dakota  Tax  Commissioner,  Report,  1919  and  1920,  pp.  38,  39. 
*  Ibid.,  pp.  39,  40,  41. 


STATE  TAXATION  OF  PERSONAL  INCOMES       [144 

.  .  .  Sentiment  in  the  state  is  almost  unanimously  in  favor  of 
an  income  tax  law.  There  are  certain  features  in  our  income  tax 
law,  however,  which  are  generally  considered  objectionable.  The 
law  is  complicated,  and  consequently  the  blanks  are  necessarily 
complicated  and  difficult  for  taxpayers  to  properly  fill  out.  There 
is  considerable  objection  to  the  discrimination  shown  in  our  present 
law  in  the  taxation  of  small  corporations  in  comparison  with  the 
taxation  of  competing  businesses  of  individuals  and  partnerships. 
Corporations  pay  a  tax  of  three  per  cent  on  their  net  income  and 
no  deduction  is  allowed  for  personal  property  taxes  paid  to  the 
state  or  local  government.  The  stockholders  of  the  corporation 
pay  a  personal  income  tax  on  dividends  received  from  the  corpora- 
tion. Dividends  are  considered  unearned  income  and  are  subject 
to  the  rates  provided  for  unearned  income.  A  business  conducted 
by  an  individual  or  partnership  is  not  subject  to  the  income  tax. 
The  individual  owner  or  partner  pays  a  tax  on  his  share  of  the 
profits  of  the  business,  his  profits  being  considered  earned  income, 
and  consequently  taxable  at  one-half  the  rate  of  unearned  income. 
In  addition  to  this,  the  individual  owner  or  partner,  in  the  case  of 
a  partnership,  is  allowed  to  deduct  his  personal  property  tax  in 
this  state,  from  the  amount  of  his  income  tax.  The  result  is  that 
the  individual  owner  of  an  ordinary  business  pays  no  tax  on  the 
earnings  of  the  business  and  pays  no  individual  income  tax  on 
account  of  the  personal  property  tax  offset. 

Further  evidence  of  the  comparative  failure  of  the  state 
personal  income  tax  in  its  present  form  is  given  in  the  fact 
that  the  receipts  bear  the  approximate  ratio  of  one  to  one 
hundred  to  the  total  state  tax.  They  form  slightly  more 
than  two  per  cent  of  the  amount  collected  in  North  Dakota 
in  1918  incomes  by  the  federal  agents. 

The  cost  of  administration  of  the  personal  and  corpora- 
tion income  taxes  combined  is  stated  by  the  tax  commis^ 
sioner  to  be  1.65  per  cent  of  the  collections.1  The  com- 
missioner notes  the  fact,  however,  that  the  larger  part  of  the 
cost  of  administration  is  chargeable  to  the  personal  income 

1  North  Dakota  Tax  Commissioner,  Report,  1919  and  1920,  p.  39. 


THE  NORTH  DAKOTA  INCOME  TAX 

tax.  More  than  18,000  individual  returns  were  handled, 
while  only  slightly  more  than  4,000  corporation  reports 
were  received.  Furthermore,  the  cost  of  clerical  assistance 
charged  against  the  income  tax  does  not  include  an  amount 
representing  the  use  of  a  considerable  part  of  the  office  force 
of  the  tax  commissioner's  office  for  three  months. 

The  following  table  shows  the  income  tax  of  individuals 
classified  according  to  the  amount  of  tax  assessed : * 

Amount  of  tax  assessed  Number        Amount       Per  cent  of   Avtrage  tax 

assessed          of  tax  total  tax     per  taxpayer 

Total,  all  groups  6,431  $53,887.17  100.00  $8.49 

Under  $50    6,152  26,899.42  49.90  4.37 

$50  and  less  than  $100 104  6,950.83  12.90  66.83 

$100  and  less  than  $200 57  7,895.04  14.65  138.51 

$200  and  less  than  $500 22  6,246.04  11.59  283.91 

$500  and  less  than  $1,000 4  2,615.11  4.85  653.78 

Over  $i,ooo 2  3,280.73  6.09  1,640.36 

The  table  given  above  illustrates  the  difficulties  and  ex- 
pense of  collecting  the  personal  income  tax  in  North  Dakota 
under  the  system  put  in  force  in  1919.  With  97  per  cent 
of  the  taxpayers  classified  paying  a  total  tax  of  less  than  $50, 
a  tax  which  in  fact  averaged  $4.37,  the  expenses  of  collec- 
tion must  have  been  proportionately  very  large  for  the 
small  incomes.  If  it  were  feasible  to  calculate  the  expense 
of  collecting  taxes  on  the  lower  classifications  of  incomes, 
startling  results  might  be  obtained,  results  which  might  in- 
fluence the  construction  of  laws  in  the  future,  or  might  at 
least  make  clear  the  fact  that  the  justification  of  such  taxes 
lies  in  the  moral  effect  on  the  taxpayer  rather  than  in  the 
resulting  additions  to  the  state  revenue. 

4.  The  future  of  the  income  tax  in  North  Dakota 

The  urgent  recommendations  made  to  the  legislature  of 
1921  by  the  state  tax  commissioner  were  principally  con- 

1  North  Dakota  Tax  Commissioner,  Report,  1919  and  1920,  p.  40. 


I46       STATE  TAXATION  OF  PERSONAL  INCOMES       [146 

cerned  with  the  extension  of  the  tax  to  various  exempted 
classes  of  income,  increases  in  the  rates,  and  a  change  in  the 
differentiation  plan. 

A  scale  of  taxation  on  personal  incomes  starting  at  one 
per  cent  on  the  first  $1,000  of  taxable  income  was  recom- 
mended. This  tax  was  to  reach  six  per  cent  at  amounts  in 
excess  of  $10,000.  The  suggested  scale  was  modeled  on  the 
Wisconsin  income  tax  rates  for  individuals,  but  it  ad- 
vanced slightly  more  rapidly,  and  reached  its  maximum 
at  a  point  $2,000  below  that  at  which  the  Wisconsin  rate  be- 
comes six  per  cent.  The  recommended  rates  should  be  put 
in  force,  in  the  opinion  of  the  tax  commissioner,  only  if  his 
recommendation  for  the  repeal  of  the  personal  property 
tax  was  also  followed.  In  that  case,  the  income  tax  should 
be  apportioned  to  the  counties  and  local  districts.  If  the  re- 
peal of  the  personal  property  tax  laws  of  the  state  should  not 
be  carried  through,  at  least  farm  machinery,  tools,  wearing 
apparel,  and  household  furniture  should  be  exempted. 

The  reasons  given  for  the  recommended  substitution  of 
the  income  tax  for  the  personal  property  tax  are  these :  * 

1.  Net  income  is  a  more  accurate  measure  of  ability  to 
pay  than  the  amount  of  personal  property  owned. 

2.  Persons    with    incomes    can    be    equitably    assessed 
through  the  income  tax,  while  all  persons  who  own 
personal  property  can  not  be  equitably  assessed  under 
the  personal  property  tax. 

With  regard  to  the  revision  of  the  income  tax  law  of 
North  Dakota,  the  tax  commissioner  further  recommended 
to  the  legislature  of  1921  that  differentiation  (that  is,  the  ap- 
plication of  different  rates  to  earned  and  unearned  income) 
should  be  abolished.  Instead,  a  graduated  surtax  should 
be  imposed  on  unearned  incomes,  in  addition  to  the  normal 

1  North  Dakota  Tax  Commission>er,  Report,  1919  and  1920,  p.  41. 


I47]  THE  NORTH  DAKOTA  INCOME  TAX 

tax.  In  this  way  one  of  the  fiscal  anomalies  of  the  1919 
law  (the  situation  in  which  the  state  receives  a  smaller  re- 
venue from  certain  combinations  o\  earned  and  unearned 
income  than  from  incomes  wholly  earned)  would  be  donei 
away  with. 

Other  recommendations  for  the  improvement  of  the  per- 
sonal income  tax  system  were  as  follows : 

The  repeal  of  the  personal  property  tax  credit. 

The  inclusion  of  income  from  mortgages  secured  on 
business  transacted  in  North  Dakota. 

The  inclusion  of  income  from  mortgages  secured  on 
North  Dakota  real  property  and  income  from  North  Dakota 
bank  deposits.  In  this  connection  the  principle  repeatedly 
enunciated  by  the  National  Tax  Association's  committee 
on  a  model  system  of  taxation  is  presented :  "  Every  person 
domiciled  in  the  state  should  make  a  direct  personal  con- 
tribution toward  the  support  of  the  state  if  such  person  has 
any  taxable  ability." 

The  maintenance  of  the  existing  exemptions,  largely  be- 
cause of  the  trouble  and  expense  of  levying  income  taxes  on 
small  incomes. 

The  extension  of  the  three  per  cent  tax  imposed  on  the 
incomes  of  corporations  to  all  business  carried  on  within 
the  state  under  whatever  form  conducted.  Otherwise,  divi- 
dends received  from  a  corporation  already  taxed  on  its  net 
income  should  be  exempted  from  taxation.  The  double 
taxation  involved  in  the  taxation  of  dividends  becomes  ob- 
jectionable only  when  all  taxpayers  are  not  given  the  same 
treatment. 

The  inclusion  in  the  permitted  deductions  of  all  losses 
actually  sustained  during  the  year  in  transactions  entered 
into  for  profit. 

Since  the  above  recommendations  were  made  the  entire 


I48       STATE  TAXATION  OF  PERSONAL  INCOMES       [148 

financial  program  of  North  Dakota  has  met  serious  opposi- 
tion and  the  future  of  the  Non-Partisan  League's  proposals 
has  become  very  problematical.  It  is  possible  that  the  in- 
come tax,  since  it  is  not  a  form  of  taxation  peculiar  to 
North  Dakota,  may  escape1  in  any  general  upheaval  which 
occurs.  At  the  time  of  writing,  however,1  such  questions 
as  those  of  its  particular  form  have  been  almost  lost  sight 
of.  The  legislature  of  1921  failed  to  pass  any  constructive 
tax  legislation.  In  spite  of  the  fact  that  the  personal  in- 
come tax  in  North  Dakota  is  a  part  of  a  program  the  whole 
course  of  which  is  doubtful,  and  has  been  handicapped 
by  the  unusually  serious  difficulties  which  its  form  brought 
upon  it  in  the  first  year  of  its  operation,  the  tax  can  still  be 
so  changed  and  adapted  that  it  will  form  a  valuable  part 
of  the  state  revenue  system.  Through  the  failures  of  the 
first  year  the  tax-yielding  capacity  of  the  various  classes 
of  income  has  been  shown  up  very  clearly.  If  more  exten- 
sive use  were  made  of  the  federal  statistics  of  income,  in 
the  way  in  which  those  figures  have  been  used  by  the  special 
revenue  commission  of  New  Mexico,  for  example,  the  tax- 
paying  power  of  the  state  at  various  hypothetical  income 
tax  rates  and  the  yield  of  any  proposed  measure  might  be 
foretold  with  a  fair  degree  of  accuracy.  A  number  of  well- 
informed  agencies  and  individuals  are  already  urging  care- 
ful and  constructive  changes  in  the  law.  The  chief  danger 
seems  to  be  that  North  Dakota  will  fail  to  recognize  the 
very  obvious  fact  that  the  state  is  art  agricultural  state,  with 
few  large  fortunes  and  few  unearned  incomes,  even  though 
the  tax  commissioner's  report  presents  statistical  proof  that 
such  is  the  case.  If  the  state's  needs  are  carefully  studied 
the  future  income  tax  can  be  far  more  effective  than  the  tax 
of  the  first  year. 

1  Early  in  1921. 


CHAPTER  IX 

THE  INCOME  TAX  MOVEMENT  IN  NEW  MEXICO 
AND  ALABAMA 

i .  The  New  Mexico  income  tax 

THE  state  of  New  Mexico,  admitted  to  the  union  in 
1910,  made  its  first  experiment  with  the  taxation  of  in- 
comes in  1919.  In  that  year  the  legislature  passed  an  in- 
come tax  law  imposing  a  graduated  tax  on  the  net  income 
of  resident  individuals  and  domestic  partnerships  and  cor- 
porations and  on  the  income  from  mines,  oil  wells  and  gas 
wells  arising  from  sources  within  the  state.1  Deductions 
were  permitted  for  interest  on  indebtedness,  repairs  and 
insurance,  taxes,  business  expenses,  losses,  bad  debts,  and 
income  from  partnerships  and  corporations  already  taxed 
under  the  act.  The  personal  exemptions  were  $1,000  for 
each  single  head  of  a  family,  $2,000  for  each  married 
head  of  a  family,  and  $200  for  each  dependent.  The 
rates  of  taxation  were  as  follows : 

Net  income                                          Rate  (per  cent) 
Above  $5,000  and  not  exceeding  $10,000 ^  of  I 


10,000 
15,000 
20,000 
30,000 
40,000 


15,000 34  of  i 

20,000 i 

30,000 iy2 

40,000 2 

50,000 2,y2 


50,000   3 

Personal  property  tax  receipts  were  to  be  accepted  as  off- 

1  Laws  of  New  Mexico,  1919,  ch.  123. 
149]  149 


STATE  TAXATION  OF  PERSONAL  INCOMES 

sets  against  income  taxes.  The  state  treasurer  was  to  ad- 
minister the  act,  but  no  special  authorization  was  given  for 
the  appointment  of  income  tax  deputies  or  the  defining  of 
income  tax  districts.  The  taxes  paid  were  assigned  to  the 
sftate  treasury  for  use  in  connection  with  the  educational 
and  other  state  institutions. 

The  bill  was  apparently  drawn  hastily,  and  questions  as 
to  its  constitutionality  were  soon  brought  up.  As  a  re- 
sult the  governor's  call  to  a  special  legislative  session  in 
February,  1920,  including  among  the  subjects  for  considera~ 
tion  an  amendment  of  the  income  tax  law  "  in  such  manner 
as  to  make  the  law  non-discriminative,  and  otherwise  to 
make  it  conformable  to  the  constitutional  limitations  on 
that  subject,  or  else  to  take  such  other  legislative  action  in 
regard  thereto  as  to  the  legislature  may  appear  to  be  right 
and  proper."  x 

A  new  income  tax  bill,  substituting  a  more  elaborate  in- 
come tax,  was  introduced  when  the  special  session  met.  In 
general  structure  the  bill  followed  the  lines  of  the  Wis-< 
cousin  act.  It  provided  for  a  higher  progressive  rate  (one 
to  five  per  cent)  on  all  income  of  residents,  both  individuals 
and  corporations,  and  on  the  income  of  non-residents  "  de- 
rived from  property  located  or  business  transacted  within 
the  state."  The  legislature  repealed  the  law  already  on  the 
statute  books,  but  declined  to  pass  the  new  bill.  Instead  it 
established  a  special  revenue  commission  and  required  it 
"  .to  inquire  into  and  make  recommendations  as  to  the  policy 
or  necessity  of  the  adoption  of  appropriate  legislation  of  a 
system  of  taxation  oi  incomes  and  the  relation  of  such  a 
system  of  taxation  to  the  present  system  of  taxation  of  pro- 
perty." The  latter  bill  was  approved  by  the  governor,  but 
the  repeal  of  the  existing  tax  law  was  vetoed.  As  a  result 

1  New  Mexico  Special  Revenue  Commission,  Report,  1920,  p.  37. 


MEXICO  AND  ALABAMA  jtji 

the  special  revenue  commission  was  given  the  task  of  pas- 
sing upon  the  desirability  of  the  adoption  of  a  tax  which  was 
already  adopted,  and  on  the  other  hand  some  of  the  advant- 
ages which  were  expected  from  the  continuance  of  the  opera- 
tion of  the  law  failed  to  materialize.  It  was  hoped  that  some 
important  constitutional  questions  concerning  the  law  might 
be  settled.  It  proved  that  the  act  was  universally  disre- 
garded and  treated  as  a  dead  letter.  Practically  no  returns; 
were  filed  (although  the  penalty  for  failure  to  file  was  fine 
and  imprisonment)  and  nothing  was  paid  into  the  state 
treasury.  The  state  treasurer  did  not  at  first  issue  the 
blanks  for  making  returns  on  the  ground  that  the  funds  to 
pay  for  such  forms  were  to  'be  drawn  from  the  proceeds  of 
a  tax  which  in  all  likelihood  would  never  be  collected. 

The  special  commission's  report  dealt  first  with  the  ques- 
tion of  constitutionality.  The  commission  noted  the  fact 
that  in  no  state  with  a  constitution  similar  to  that  of  New 
Mexico  had  a  progressive  income  tax  been  upheld.1  On  the 
other  hand,  it  reached  the  conclusion  that  a  law  imposing  a 
tax  on  incomes  at  a  flat  rate  would  be  reasonably  safe  from 
attack  on  constitutional  grounds.  It  held  also  that  the 
classification  of  corporations  by  exclusion  would  be  a 
justifiable  measure.  The  commission  expressed  its  belief 
that  income  could  not  be  correctly  classified  as  property. 

The  commission  recommended  a  strictly  personal  income 
tax  applying  to  the  net  income  of  every  person  within  the 
state.  The  exemptions  should  be  made  exactly  the  same 
as  those  under  the  federal  income  tax  law,  not  only  because 
the  federal  exemptions  are  believed  to  be  "  essentially  reason- 
able and  just "  but  also  on  account  of  the  administrative 
advantage  of  an  effective  check  on  evasion.  The  deter- 
mination of  taxable  income  should  also  follow  along  the 

1  New  Mexico  Special  Revenue  Commission,  Report,  1920,  p.  38  et  seq. 


I52        STATE  TAXATION  OF  PERSONAL  INCOMES 

lines  of  the  federal  tax.  With  regard  to  the  question  of 
rates,  the  commission  held  that  as  long  as  the  federal  rates 
remained  at  the  existing  high  level,  New  Mexico  was  pre- 
cluded from  establishing  a  heavily  progressive  state  in- 
come tax.  The  soundest  considerations!  were  those  in- 
dicating a  low  flat  rate.  This  rate  should  not  be  more  than 
four  per  cent,  and  during  the  first  year  of  administration 
should  not  'be  more  than  two  per  cent.  Using  the  statistics 
of  income  compiled  by  the  federal  government,  the  conn 
mission  concluded  that  a  two  per  cent  rate  on  1920  in- 
comes would  bring  in  about  $300,000. x 

The  commission  considered  that  the  "  simplest  and  most 
sensible  "  disposition  of  the  yield  would  be  to  dedicate  it 
to  the  state  school  fund.  In  states  where  the  localities  have 
been  asked  to  surrender  certain  taxes  as  a  condition  to  the 
establishment  of  the  income  tax,  it  has  usually  proved  ad- 
visable to  apportion  a  share  of  the  income  tax  receipts  dir- 
ectly to  the  local  authorities.  In  New  Mexico  no  consider- 
able sacrifices  would  be  made  by  the  counties  and  a  direct  ap- 
portionment would  be  unnecessary.  The  commission  re- 
commended that  the  state  tax  commission  should  be  given 
the  administration  of  the  income  tax  law. 

In  the  opinion  of  the  commission  the  establishment  of  a 
personal  income  tax  should  be  accompanied  by  the  passage 
of  a  law  exempting  intangible  personal  property  from  tax- 
ation. With  an  income  tax,  the  owners  of  such  intangibles 
would  be  contributing  to  the  support  of  the  state.  The 
older  system  of  personal  property  taxation  has  been  a 
lamentable  failure  in  New  Mexico,  as  it  has  elsewhere. 

The  commission's  report  was  presented  in  November, 
1920,  and  it  was  believed  that  the  legislature  of  1921  would 
base  legislation  upon  its  recommendations.  The  commis- 

1  New  Mexico  Special  Revenue  Commission,  Report,  1920,  p.  50. 


I53]  MEXICO  AND  ALABAMA  153 

sion  wisely  took  account  of  the  fact  that  New  Mexico  is 
a  state  in  which  somewhat  "  primitive  economic  conditions  " 
still  prevail  (the  state  paid  only  nine-hundredths  of  one 
per  cent  of  the  total  federal  income  taxes  paid  for  1918) 
and  framed  its  recommendations  accordingly.  However 
interesting  the  experiment  in  New  Mexico  may  be,  its  ex- 
perience cannot  yet  be  of  great  value  in  guiding  the  weal- 
thier industrial  states  in  shaping  their  legislation. 

2.  The  attempt  to  introduce  an  income  tax  in  Alabama 

In  1919-1920  the  state  of  Alabama  made  its  second  ex- 
periment with  an  income  tax  law.  The  first  income  tax, 
which  was  levied  from  1843  to  1884,  began  its  existence  as 
a  tax  on  specified  business  incomes.  In  the  course  of  its 
existence  frequent  revisions  were  made  and  the  tax  changed 
character  almost  completely.  In  1844  the  list  of  profes- 
sions was  enlarged,  and  in  1848  extended  to  include  all  pro" 
fessions  and  business  except  those  of  artisans  and  manual 
laborers.  In  1850  the  law  was  so  modified  that  the  profes- 
sional income  tax  became  partly  a  license  tax.  In  1862 
the  rates  of  the  income  tax  were  again  increased  and  its 
application  extended.  Finally,  in  1866  a  general  income 
tax  of  "  one  per  cent  ....  upon  the  annual  gains,  profits, 
salaries,  and  income  in  excess  of  $500  received  by  any  per- 
son within  the  state  "  was  adopted.1 

After  the  close  of  the  Civil  War  the  administration  o£ 
the  income  tax  degenerated  rapidly.  The  yield  decreased 
from  about  $11,000  out  of  a  total  state  tax  of  $1,122,000 
in  1870  to  $8,100  in  i879.2  At  the  same  time  the  tax  was 
becoming  increasingly  unpopular.  As  a  result  of  the  recom- 
mendations of  the  state  auditor  the  provisions  for  levying 

1  D.  O.  Kinsman,  The  Income  Tax  in  the  Commonwealths  of  the 
United  States  (New  York,  1903),  p.  80. 
9  E.  R.  A.  Seligman,  The  Income  Tax  (New  York,  1914),  p.  410. 


STATE  TAXATION  OF  PERSONAL  INCOMES 

the  state  tax  were  dropped,  and  after  41  years  of  existence 
the  income  tax  of  Alabama  came  to  an  end. 

The  law  passed  in  1919*  represented  one  of  a  series  of 
revenue  reforms  undertaken  'by  the  legislature  of  that  year. 
A  graduated  tax  was  imposed  upon  the  incomes  of  resident 
individuals  and  domestic  corporations,  and  upon  the  income 
of  non-resident  individuals  and  foreign  corporations  arising 
within  the  state.  The  customary  deductions  were  allowed. 
The  sums  of  $1,000  for  the  individual,  $2,000  for  a  married 
person  or  the  head  of  a  family,  and  $300  for  each  depen- 
dent, were  allowed  as  exemptions.  The  income  was  was 
to  be  assessed  at  the  following  rates : 

Net  income  Rate  (per  cent) 

In  excess  of  $5,000 2 

In  excess  of  $5,000  but  not  in  excess  of  $7,500 2^ 

In  excess  of  $7,500  but  not  in  excess  of  $10,000 3 

In  excess  of  $10,000  but  not  in  excess  of  $15,000 3J4 

In  excess  of  $15,000 4 

The  state  tax  commission,  created  under  the  terms  of  the 
same  act,  was  given  the  duty  of  administering  the  law,  and 
one  of  its  members,  to  be  known  as  the  income  tax 
supervisor,  was  to  administer  it.  After  deducting  the  com- 
missions of  the  local  collectors,  35  per  cent  of  the  proceeds 
of  the  tax  were  to  go  to  the  municipality  of  which  the  tax- 
payer was  a  resident,  25  per  cent  to  the  county,  and  the 
balance  to  the  state.  The  form  of  the  law,  with  its  pro- 
vision for  graduated  rates,  central  control,  and  the  distri- 
bution of  the  proceeds,  showed  the  influence  of  the  success- 
ful measures  of  the  few  years  preceding  its  enactment,  and 
contained  the  promise  of  a  far  more  effective  income  tax1 
than  that  which  Alabama  abandoned  in  1884. 

The  income  tax  law  of  1919  was  shortlived.     On  March 

1  Laws  of  Alabama,  1919,  ch.  328. 


MEXICO  AND  ALABAMA 

20,  1920,  its  was  held  unconstitutional  in  the  circuit  court, 
on  the  ground  that  as  a  property  tax  it  exceeded  the  con- 
stitutional limit  of  65  cents  per  $100,  and  on  the  ground 
that  it  was  discriminatory  in  character.  This  decision  was 
affirmed  by  the  state  supreme  court  on  April  24,  I92O.1 

Although  New  Mexico  and  Alabama  are  both  relatively 
poor  states  with  little  modern  industrial  enterprise  within 
their  borders,  the  occasion  for  the  experiments  with  the 
income  tax  is  the  same  in  each  instance, — the  omnipresent 
dissatisfaction  with  the  property  tax.  The  special  commis- 
sion in  New  Mexico  called  attention  to  the  fact  that  even 
in  that  state  where  "  the  economic  strength  of  the  state  is 
still  largely  implicit "  personal  property  had  almost  entirely 
disappeared  from  the  assessment  rolls.  The  amount  of 
such  property  which  escapes  taxation  in  such  a  state  is  small, 
relatively  at  least,  but  it  is  plainly  the  mark  of  prudence  to 
recognize  the  situation  as  early  as  possible  and  to  make  the 
necessary  changes  in  the  revenue  system.  In  these  states1 
the  attempt  has  failed  at  first,  for  varying  reasons,  but  in 
both  cases  there  is  evidence  that  the  dissatisfaction  with  the 
old  system  has  not  been  quieted  and  that  fresh  efforts  for 
reform  are  to  follow. 

1  Bulletin  of  the  National  Tax  Association,  vol.  v,  no.  8  (May,  1920), 
pp.  262,  263;  vol.  v,  no.  9  (June,  1920),  p.  292. 


CHAPTER  X 
THE  INCOME  TAX  MOVEMENT  IN  OTHER  STATES 

THE  present  period  of  interest  in  the  taxation  of  personal 
incomes  as  a  means  of  remedying  the  inequities  of  the 
personal  property  tax  and  of  bringing  about  contributions 
to  the  expenses  of  the  state  from  those  best  able  to  pay  has' 
not  beeen  confined  to  the  states  whose  income  tax  measures 
have  been  described  in  the  preceding  chapters.  In  a 
number  of  other  states,  particularly  in  Ohio,  Georgia,  and 
California,  the  movement  has  attained  considerable  pro- 
minence and  at  times  the  adoption  of  the  income  tax  has 
seemed  imminent.  In  other  states  preliminary  steps  have 
been  taken.  In  the  following  pages  the  most  significant  of 
these  movements  are  described. 

i.  Proposals  for  an  income  tax  in  Ohio 

The  constitution  of  the  state  of  Ohio  contains  provision 
for  the  adoption  of  an  income  tax,1  but  no  active  steps  were 
taken  in  that  direction  until  the  state  revenue  system  was 
submitted  to  scrutiny  by  a  special  committee  in  1919.  The 
General  Assembly  of  1919,  which  convened  early  in 
January,  recognized  at  once  the  pressing  nature  of  the  fin- 
ancial problems  bef ore  it.  Both  state  and  municipal  treas- 
uries were  facing  serious  shortages  at  that  time.  Emer- 
gency measures  were  promptly  enacted,  a  committee  was 
appointed  to  recommend  legislative  measures  for  increasing 
the  revenue,  and  a  recess  was  taken  in  order  to  allow  the 

1  Constitution  of  Ohio,  art.  ii,  sec.  8. 
156  [156 


157]      INCOME  TAX  MOVEMENT  IN  OTHER  STATES      157 

committee  time  in  which  to  do  its  work.  The  committee, 
known  as  the  Special  Joint  Taxation  Committee  of  the  83rd 
Ohio  General  Assembly,  rendered  its  report  in  December, 
1919.  The  new  revenue  measures  recommended  by  the 
committee  were  an  income  tax,  an  inheritance  tax,  and  a 
tax  on  motor  vehicles. 

During  the  course  of  the  preparation  of  its  income  tax 
bill  the  committee  made  a  study  of  the  experience  of  those 
states  which  had  had  the  best  results  with  income  taxes, 
particularly  Wisconsin,  Massachusetts,  and  New  York. 
Use  was  also  made  of  the  plan  for  a  model  system  of  state 
and  local  taxation  prepared  by  a  committee  of  the  National 
Tax  Association  (See  Appendix  I).  The  bill  provided  that 
the  tax  should  be  imposed  only  upon  the  incomes  of  persons 
resident  in  the  state,  but  that  all  income  received  by  resi- 
dents of  'the  state,  from  whatever  source  derived,  should 
be  included  in  the  return  of  income.  Professor  Harley 
L.  Lutz,  economic  adviser  to  the  committee,  comments  as 
follows  on  the  taxation  of  non-residents:1 

The  attempt  to  tax  nonresidents  upon  the  income  from  property 
owned  and  from  business,  trades,  professions  or  occupations  car- 
ried on  in  New  York  was  inspired  by  a  local  situation  which  has 
no  parallel  in  Ohio.  A  large  number  of  persons  do  business  or 
earn  incomes  in  New  York  and  reside  in  New  Jersey,  and  the  tax 
on  nonresidents  was  confessedly  aimed  at  this  group.  The  taxa- 
tion of  nonresidents  is  not  approved  by  the  committee  on  a  model 
tax  system,  and  its  argument  against  the  practice  is  familiar  to 
this  committee. 

The  definition  of  gross  income  in  the  committee's  bill 
followed  closely  that  contained  in  the  federal  law.  Stock 
dividends  were  excluded  from  taxable  income.  The  deduc- 
tions for  the  purpose  of  determining  taxable  net  income 

1  H.  L.  Lutz,  "  The  Operation  of  State  Income  Taxes,"  Report  of  the 
(Ohio)  Special  Joint  Taxation  Committee,  p.  107  of  the  report 


I58       STATE  TAXATION  OF  PERSONAL  INCOMES       [158 

followed  those  of  the  federal  law.  The  exemptions  were 
set  at  $500  for  unmarried  persons  and  $1,000  for  married 
persons,  with  $200  additional  for  each  dependent.  The 
committee  recognized  the  fact  that  these  limits  were  un- 
usually low : * 

We  recognize  that  these  figures  mean  an  encroachment  upon  that 
subsistence  minimum  which  all  authorities  agree  should  be  ex- 
empted, but  we  have  ventured  thus  far  because  of  our  desire  to 
secure  as  wide  a  diffusion  of  the  burden  of  the  income  tax  as 
possible,  and  also  because  of  the  need  of  additional  revenue  from 
the  tax. 

The  committee  considered  the  possibility  of  requiring 
taxpayers  to  file  a  copy  of  their  federal  returns  upon  which 
the  state  income  tax  might  be  applied,  but  decided  against 
it  on  several  grounds.  First,  the  conflict  of  tax  jurisdic- 
tions would  involve  complications ;  second,  there  were  other 
differences  in  the  determination  of  gross  and  net  income; 
and  third,  it  seemed  desirable  from  the  administrative  stand- 
point of  the  state  to  have  a  separate  return  made,  so  that 
the  state  authorities  might  have  complete  control  over  a  set 
of  returns. 

The  bill  placed  the  state  tax  commission  in  general  charge 
of  the  income  tax,  and  enlarged  the  commission  for  that 
purpose.  The  county  auditor  was  made  local  collector 
of  incomes,  ex-officio,  and  was  to  appoint  deputies  and  other 
assistants.  Returns  were  to  be  made  to  the  county  auditors. 
The  county  auditor  was  to  make  the  assessment,  and  the  tax 
was  to  be  collected  by  the  county  treasurer  "  at  the  same 
time  and  in  the  same  manner  as  other  taxes."  The  taxi 
commission  was  empowered  to  require  information  at  the 
source. 

^Report,  p.  75. 


1 59]      INCOME  TAX  MOVEMENT  IN  OTHER  STA TES      1 59 
The  rates  of  taxation  to  be  applied  were  as  follows : 

Taxable  income  Rate  (per  cent) 

First  $4,000 i 

Above  $4,000   2 

The  committee  took  advantage  of  the  material  on  the 
status  of  incomes  in  the  various  states  through  the  publica- 
tion of  Statistics  of  Income  for  1917  by  the  United  States! 
income  tax  authorities,  and  prepared  a  careful  statement  of 
the  yield  of  the  tax  on  incomes  above  $2,000.  Taken  to- 
gether with  the  estimates  of  the  probable  yield  of  the  taxj 
on  incomes  below  that  amount,  the  probable  yield  of  the 
total  tax  was  estimated  at  from  $7,000,000  to  $8,000,000. 

The  proposed  distribution  of  the  proceeds  was  in  the 
ratio  of  three-fourths  to  the  municipal  corporations  and 
townships  in  which  the  funds  originated,  and  one-fourth 
to  the  state  to  become  part  of  the  general  revenue.  This 
provision  gave  recognition  not  only  to  the  constitutional 
requirement  in  Ohio  that  50  per  cent  of  the  collection  of 
such  taxes  must  be  returned  to  the  source,  but  also  to  the 
great  needs  of  the  cities.  The  well-known  fact  that  the 
income  tax  has  always  proved  to  be  an  urban  tax  was  noted, 
and  it  was  anticipated  that  from  the  apportionment  to 
the  localities  of  about  $6,000,000  of  the  estimated  yield  in 
the  first  year  of  the  collection  of  the  tax  the  cities  would 
obtain  some  relief  from  the  serious  financial  difficulties 
under  which  they  were  laboring  at  the  time  when  the  com- 
mission was  doing  its  work,  although  the  relief  for  the 
year  1920  would  still  be  inadequate. 

The  income  tax  bill  was  promptly  defeated  by  both 
branches  of  the  legislature  when  it  was  introduced  in  De- 
cember, I9I9.1  The  basis  of  opposition  was  the  argument 

1  Bulletin  of  the  National  Tax  Association,  vol.  v,  no.  5  (Feb.,  1920), 
P.  133- 


!6o        STATE  TAXATION  OF  PERSONAL  INCOMES       [160 

that  such  a  law  must  necessarily  contain  inquisitorial  pro- 
visions which  would  disclose  intangible  property  to  the 
taxing  officials,  with  the  result  that  it  would  thenceforward 
be  subject  to  taxation,  and  the  arguments  of  banks  and  other 
financial  institutions  that  serious  injuries  to  their  business 
would  follow  the  passage  of  such  an  act.  Repeated  at- 
tempts were  made  to  pass  the  bill  with  amendments  covering 
some  of  the  points  under  objection,  but  all  hope  of  its 
ultimate  passage  was  finally  abandoned  late  in  December, 
1919. 

2.  The  income  tax  movement  in  Georgia 

In  Georgia  a  recent  attempt  to  introduce  a  personal  in- 
come tax  has  failed,  although  the  evidence  indicates  that  the 
movement  had  and  probably  still  has  the  force  of  a  con-i 
siderable  body  of  public  opinion  behind  it.  Georgia  had 
had  one  rather  unusual  experience  with  the  personal  in- 
come tax  at  the  time  of  the  Civil  War.1  In  1863  a  tax  on 
profits  was  levied,  with  a  progressive  rate  based  on  the 
ratio  of  income)  to  capital,  and  so  planned  that — theo-t 
retically  at  least — if  profits  were  ten  time  capital  the  entire 
income  went  as  taxes.  Evasion  and  fraud  very  naturally^ 
resulted,  and  the  tax  was  dropped  soon  after  the  war. 

The  late  attempt  to  introduce  an  income  tax  drew  its! 
support  from  a  knowledge  of  the  increasing  use  of  the  per- 
sonal income  tax  in  other  states,  In  Georgia,  as  in  other 
states,  Civil  War  experiments  are  recognized  to  have  little 
value  in  dealing  with  twentieth-century  fiscal  problems. 
In  1918  the  legislature  found  the  state's  sources  of  revenue 
inadequate  to  provide  funds  for  the  ever-increasing  govern- 
ment expenses  and  at  the  same  time  it  realized  the  serious- 
ness of  the  restrictions  upon  the  taxing  power  found  in  the 

1  Seligman  op.  cit.,  pp.  411,  412. 


l6l]      INCOME  TAX  MOVEMENT  IN  OTHER  STATES 

state  constitution.  A  special  tax  commission  was  at  once 
appointed  to  investigate  the  state's  tax  system  and  to  com- 
pare it  with  that  of  other  states  and  countries.  This  com- 
mittee, reporting  in  1919,  suggested  several  important 
changes  in  the  system,  and  included  in  its  recommendations 
a  proposal  for  a  constitutional  amendment  permitting  the 
imposition  of  income  and  inheritance  taxes  with  graduated 
rates.  The  committee  described  its  position  as  follows : * 

Recognizing,  as  we  do,  that  an  income  tax  is  perhaps  the  fairest 
and  most  equitable  method  of  raising  revenue,  particularly  from 
those  classes  of  property  which  are  the  most  difficult  to  assess,  we 
are  pleased  to  note  that  Congress  has  enacted  a  law  which  gives 
those  states  having  an  income  tax  law,  upon  the  request  of  the 
Governor  of  the  State,  access  to  the  data  upon  which  the  federal 
income  tax  is  now  assessed,  so  far  as  it  affects  corporations,  and 
we  hope  that  a  similar  provision  will  soon  be  made  in  that  affect- 
ing the  income  of  individuals. 

The  only  reasonable  objections  to  taxation  by  this  method  being 
the  difficulty  and  expense  attending  its  administration,  and  both 
of  these  having  been  entirely  eliminated  by  the  granting  of  the 
privilege  mentioned  above,  we  recommend  that  Georgia  get  in  line 
by  enacting,  as  soon  as  the  Constitutional  amendment  hereinbefore 
provided  for  will  permit,  a  law  providing  for  taxation  on  an  in- 
come basis,  and  at  a  very  low  rate. 

The  proposed  legislation  received  a  favorable  report  from 
the  committee  on  constitutional  amendments  of  the  legis- 
lature of  1919,  but  action  was  deferred  until  the  1920  ses- 
sion. In  the  summer  session  of  1920  a  bill  providing  for 
a  constitutional  amendment  authorizing  the  levy  and  collec- 
tion of  an  income  tax  was  passed  by  the  House  of  Re- 
presentatives but  failed  of  passage  in  the  Senate.  If  pas- 
sed, the  proposal  was  to  have  been  submitted  to  the  voters 
at  the  election  in  November,  1920.  The  failure  of  the  bill 
in  the  legislature  of  1920  means  that  a  considerable  period 

1  (Georgia)  Special  Tax  Commission,  Report,  1919,  p.  43. 


STATE  TAXATION  OF  PERSONAL  INCOMES       [162 

must  elapse  before  a  personal  income  tax  bill  can  again  be 
passed  by  the  legislature  and  the  proposal  ratified  by  the 
people. 

3.  The  income  tax  movement  in  California 

The  agitation  for  an  income  tax  in  California  was  only 
temporarily  quieted  by  the  presentation  of  an  unfavorable 
commission  report  in  1906.  After  the  Wisconsin  experi- 
ence demonstrated  the  practicability  of  an  income  tax  of  a 
new  kind  the  interest  in  the  tax  in  California  increased. 
Bills  providing  for  a  personal  income  tax  have  reached 
several  legislatures  but  have  failed  of  passage.  In  late 
years  one  of  the  most  earnest  advocates  of  the  adoption  of 
the  tax  has  been  Mr.  Clifton  E.  Brooks,  member  of  the 
legislature  for  Oakland.  Mr.  Brooks  stated  his  position 
in  the  California  Taxpayers'  Journal  in  September, 


The  income  tax  for  the  state  will  not  be  an  experiment.  In 
Wisconsin  it  is  producing  annually  a  revenue  of  $2,000,000  and 
in  Massachusetts  $12,000,000  from  sources  that  previously  escaped 
taxation  for  the  most  part.  In  population  and  wealth,  California 
ranks  about  half-way  between  Wisconsin  and  Massachusetts.  It 
would  not  be  a  matter  of  too  abundant  optimism  to  estimate  the 
revenue  that  California  could  develop  from  this  source  at  $6,000,- 
000.  .  .  . 

The  income  tax  is  also  desirable  because  it  will  provide  an  op- 
portunity to  abolish,  at  a  later  date,  present  crude,  inefficient  and 
unjust  methods  of  taxing  (  1  )  Personal  Property  and  (  2  )  Corpora- 
tion Franchises.  All  assessors  regard  the  present  method  of  tax- 
ing personal  property  as  the  "  joke  "  tax.  When  the  income  tax 
is  established,  taxes  paid  upon  personal  property  should  be  de- 
ducted for  awhile,  as  the  income  tax  would  be  used  solely  to  hunt 
out  the  "  personal  property  tax  slacker  "  as  before  stated.  When 
it  could  be  demonstrated  that  the  income  tax  was  the  most  effi- 
cient method  of  raising  public  revenue  from  this  source,  then  the 

*€.  E.  Brooks,  "Shall  we  have  an  Income  Tax?",  California  Tax- 
payers' Journal,  vol.  iii,  no.  7  (Sept.,  1919).  PP-  12,  13. 


INCOME  TAX  MOVEMENT  IN  OTHER  STATES      163 

logical  step  would  be  to  abolish  the  personal  property  tax.  It 
should,  perhaps,  be  mentioned  at  this  point  that  rates  in  connec- 
tion with  a  state  income  tax  would  be  very  low.  The  federal  tax 
produces  in  California  $76,000,000.  Since  the  amount  which  it 
would  be  desirable  to  raise  from  this  source  would  be  only  about  a 
twelfth  or  thirteenth,  the  rate  need  be  but  a  fraction  of  the  fed- 
eral rate. 

Mr.  Brooks  introduced  a  bill  embodying  his  opinions  in 
the  legislature  of  1921,  as  the  first  bill  presented.  Every 
individual  and  corporation  subject  to  the  federal  income 
tax  was  included  under  the  terms  of  the  proposed  legis- 
lation. The  net  income  arrived  at  in  the  federal  return  less 
the  tax  paid  to  the  United  States  and  income  received  from 
investments  without  the  state  would  be  the  net  income  for 
the  purposes  of  determining  the  amount  of  the  tax  due. 
The  rates  of  the  proposed  tax  were  as  follows : 

Taxable  income  Rate  (per  cent) 

First  $10,000 I 

Next  $40,000 2 

Above  $50,000   3 

The  proposed  measure  against  the  judgment  of  some 
of  the  persons  interested  in  its  passage,  failed  to  provide 
for  exempting  intangible  personal  property  from  taxation. 
Income  derived  from  sources  within  the  state  was  ex- 
empted. Opposition  to  the  bill  developed  at  once,  and 
the  assumed  high  cost  of  collection  received  considerable 
emphasis.  It  was  also  urged  that  the  tax  would  be  in- 
quisitorial in  character. 

4.  Other  steps  towards  income  taxes 

For  a  number  of  years  New  Hampshire  has  been  included 
in  the  list  of  states  in  which  the  question  of  an  income  tax 
is  under  consideration.  The  constitutional  convention 
assembled  in  June,  1918,  took  up  the  question  of  an  in- 


!64       STATE  TAXATION  OF  PERSONAL  INCOMES       [164 

come  tax  amendment,  but  the  convention  found  it  necessary 
to  postpone  all  of  its  business  until  after  the  close  of  the 
war.  In  January,  1920,  the  convention  met  again.  It  was* 
recommended  that  the  income  tax  amendment  be  referred 
to  the  people  in  the  election  of  November,  1920. 

At  that  time  New  Hampshire  was  greatly  in  need  of  in- 
creased revenue  and  the  unprecedented  increase  in  local  as- 
sessments made  it  appear  that  the  taxes  on  tangible  pro- 
perty were  nearing  the  "  limit  of  endurance."  x  Neverthe- 
less the  income  tax  amendment,  together  with  six  others, 
was  defeated  in  the  election  of  November,  1920.  It  was 
believed  by  the  supporters  of  the  amendment  that  the  con- 
sideration which  these  measures  would  ordinarily  have  re- 
ceived was  lacking  on  account  of  the  intense  interest  in  the 
presidential  election.  The  constitutional  convention  wasi 
expected  to  reconvene  in  1921  and  to  submit  the  amendment 
to  the  voters  again.  The  situation  in  New  Hampshire  ap^ 
pears  to  promise  well  for  the  introduction  of  the  income 
tax  if  the  matter  is  brought  up  a  second  time. 

The  proposal  for  an  income  tax  in  Minnesota  has  had  an 
almost  similar  fate.  The  legislature  of  1919  voted  to>  sub- 
mit an  income  tax  to  the  people  at  the  next  election.  The 
amendment  provided  that  "  taxes  may  be  imposed  on  pri- 
vileges and  occupations,  which  taxes  may  be  graduated  and 
progressive  and  the  exemption  of  a  reasonable  amount  of 
income  from  taxation  may  be  provided,  and  such  taxes  may 
be  in  lieu  of  taxes  on  any  class  or  classes  of  personal  pro- 
perty as  the  legislature  may  determine."  The  amendment 
failed  of  passage  in  the  November  elections. 

A  number  of  other  states  are  taking  up  the  question  of 
income  taxes.  Indiana  has  adopted  a  constitutional  amend- 

1  A.  O.  Brown,  "  The  Taxation  of  Incomes  under  the  New  Hampshire 
Constitution,"  Bulletin  of  the  National  Tax  Association,  vol.  iv,  no.  5 
(Feb.,  1919),  P.  121. 


INCOME  TAX  MOVEMENT  IN  OTHER  STATES      165 

ment  providing  for  the  tax.  In  Maine  and  Oregon  the  mat- 
ter has  come  up  repeatedly,  only  to  be  defeated.  New  bills) 
failed  of  passage  in  Kansas  and  in  Utah  in  1921.  Most 
important  of  all,  New  Jersey  has  called  for  the  presentation 
to  the  legislature  of  1922  O'f  a  bill  providing  for  a  state  in- 
come tax  on  a  sliding  scale.  If  a  third  great  industrial 
state  follows  New  York  and  Massachusetts,  the  spread  of 
the  movement  throughout  the  eastern  states  is  probable. 


CHAPTER  XI 
MODERN  INCOME  TAX  METHODS  AND  RESULTS 

IN  the  course  of  a  decade  of  development  of  state  tax- 
ation of  incomes  the  characteristics  of  this  type  of  tax  in 
the  United  States  have  become  fairly  well-defined.  On  the 
whole  the  taxes  on  personal  incomes  have  been  introduced 
in  the  form  and  manner  most  immediately  practicable,  with- 
out the  accompaniment  of  plans  for  a  coherent  tax  system. 
The  majority  of  the  state  income-tax  laws  and  rulings  which 
now  appear  so  highly  complex  have  "  just  growed  "  like  the 
famous  little  negress  of  fiction.  We  look  in  vain  for  a 
debate  on  "  graduation "  of  the  type  which  occurred  re- 
peatedly in  the  English  House  of  Commons  from  the  middle 
of  the  nineteenth  century  until  early  in  the  twentieth  when 
an  extensively  graduated  scale  of  taxation  for  individual  in- 
comes was  adopted.  "  Differentiation "  between  earned 
and  unearned  incomes,  which  has  'been  produced  in  two 
states  by  employing  different  rates  of  taxation  for  funded 
and  unfunded  incomes,  has  been  introduced  with  little  reali- 
zation of  the  complicated  principles  involved  or  of  the  pos- 
sible perversity  of  state  revenues  under  the  plan.  Systems 
of  exemptions  and  deductions  have  grown  up  which  bear  a 
rough  resemblance  to  those  devised  for  the  federal  income 
tax  law  but  which  are  still  in  a  confused  state.  Double  tax- 
ation, rapidly  becoming  a  pressing  problem,  has  been  almost 
ignored  except  in  a  few  instances.  Administrative  methods 
have  been  recognized  as  important  from  the  beginning  of 
166  [166 


MODERN  INCOME  TAX  METHODS  167 

the  decade,  and  although  there  are  still  backward  states, 
several  effective  organizations  have  been  built  up. 

i.  Income  tax  rates 

The  policies  of  the  American  states  with  regard  to  pro- 
gression are  in  a  chaotic  condition.  Seven  of  the  states) 
imposed  graduated  rates  upon  personal  incomes  at  the  be- 
ginning of  1921.  No  two  of  these  systems  were  alike.  At 
one  extreme  was  Virginia,  with  a  rate  of  one  per  cent  on 
the  first  $3,000  of  taxable  income  and  two  per  cent  on  the 
remainder,  and  at  the  other  was  North  Dakota,  with  23 
separate  rates,  reaching  a  maximum  of  10  per  cent  on 
earned  incomes  of  more  than  $40,000.  The  degree  of  pro- 
gression employed  appears  to  have  varied  inversely  with  the 
desire  of  the  state  legislators  to  fit  the  personal  income  taxi 
inconspicuously  into  the  existing  state  and  federal  systems, 
and  directly  with  the  desire  to  extract  a  considerable  por- 
tion of  the  state  revenues  from  individuals  in  possession  of 
large  fortunes. 

The  arguments  for  and  against  progression  are  simple. 
Since  the  surplus  over  and  above  the  amount  required  for 
the  necessaries  of  life  increases  more  rapidly  than  additions 
to  total  income,  persons  at  the  higher  income  levels  are  able 
to  pay  relatively  large  amounts  towards  the  support  of  the 
government  under  which  they  live  than  those  with  smaller 
incomes.  An  ability  theory  of  taxation  consequently  de- 
mands the  progressive  taxation  of  personal  incomes.  Only 
by  adhering  to  a  benefit  theory  of  taxation  can  a  progres- 
sive rate  for  this  type  of  tax  be  opposed.  The  chief  com- 
plicating factor  in  the  United  States  is  the  existence  of  a 
federal  income  tax  which  reaches  an  extremely  high  rate  on 
the  largest  incomes.  When  the  richest  individuals  in  the 
country  are  already  paying  into  the  federal  treasury  am- 
ounts corresponding  to  73  per  cent  on  a  part  of  the  income 


!68       STATE  TAXATION  OF  PERSONAL  INCOMES 

received,  even  the  most  ardent  advocate  of  contribution  ac- 
cording to  ability  is  satisfied.  The  absorption  of  any  con- 
siderable part  of  the  remainder  by  any  government  whatso- 
ever might  properly  be  regarded  as  approaching  confisca- 
tion. The  state  governments,  therefore,  must  take  into 
account  the  fact  that  individuals  taxed  by  them  are  already 
paying  into  the  national  exchequer  amounts  graded  with 
the  intention  of  exacting  contributions  in  accordance  with 
ability  to  pay,  and  must  be  on  their  guard  lest  the  care- 
fully devised  federal  plan  be  distorted  through  the  opera- 
tion of  the  state  tax. 

The  weight  of  argument  at  the  present  time  is  on  the 
side  of  a  mildly  progressive  tax,  not  rising  above  six  per 
cent,  for  the  use  of  the  states.  A  tax  of  this  kind  is 
plainly  in  accord  with  the  principles  of  ability  taxation,  and 
at  the  same  time  the  maximum  is  so  low  that  the  intentions 
of  the  federal  tax  f  ramers  are  not  seriously  interfered  with. 
If  the  state  income  tax  is  imposed  at  a  proportional  rate, 
even  though  this  rate  is  fixed  at  a  point  which  produces  a 
large  return,  the  burden  of  the  tax  upon  the  persons  in  re- 
ceipt of  small  incomes  is  relatively  so  much  heavier  than 
upon  the  well-to-do  that  a  general  and  merited  dissatisfac- 
tion with' the  state  income  tax  is  likely  to  result. 

Differentiation  between  earned  and  unearned  incomes 
for  purposes  of  taxation,  with  the  imposition  o>f  a  higher 
rate  upon  the  latter,  has  received  far  less  attention  in  this1 
country  than  in  England.  In  Massachusetts  the  taxation 
of  income  from  intangibles  at  six  per  cent  while  business 
incomes  are  taxed  at  one  and  one-half  per  cent *  is  the  re- 
sult of  an  attempt  to  distinguish  earned  from  unearned  in- 
comes. The  rates  employed  in  the  taxation  of  income  from 
intangibles  are  unusually  heavy  in  comparison  with  those 

3  Exclusive  of  emergency  additions  to  the  rates. 


169]  MODERN  INCOME  TAX  METHODS  I6g 

on  business  incomes.  In  North  Dakota  the  rates  on  the 
lower  amounts  of  unearned  income  are  only  double  those 
on  similar  amounts  of  earned  income  and  the  distinction 
disappears  after  $40,000  is  reached.  No  other  state  ac- 
complishes differentiation  by  direct  means,  and  in  the 
federal  system  the  distinction  between  the  two  types  of  in- 
come is  ignored.  In  England  differentiation  was  recog- 
nized as  a  desirable  principle  and  introduced  to  a  minor 
extent  in  1907.  In  subsequent  years  the  scheme  was  elabor- 
ated until  five  different  rates  were  applied  to  earned  in- 
comes below  the  point  of  £2,500,  at  which  the  full  normal! 
rate  was  put  into  effect.  At  the  present  time  the  trend  of 
opinion  in  England  is  in  the  direction  of  diminishing  the 
amount  of  differentiation  employed.  The  Royal  Commis- 
sion on  the  Income  Tax  which  reported  in  1920  held  that 
differentiation  had  been  carried  too  far  and  that  the  devices 
employed  operated  unjustly  with  respect  to  certain  classes 
of  taxpayers.  The  Commission  noted  the  general  impres- 
sion that  small  unearned  income  (or  "  investment "  in- 
comes, as  the  Commission  preferred  to  call  them)  which 
were  derived  mainly  from  investment  of  savings  out  of 
earned  income  were  harshly  treated,  and  suggested  as  a 
remedy  for  this  and  other  evils  of  the  differentiation  plan 
the  simple  device  of  diminishing  earned  incomes  by  one- 
tenth  for  purposes  of  taxation.1 

Much  of  the  sentiment  in  the  United  States  is  against 
differentiation,  for  the  present  at  least.  A  strong  argu- 
ment for  such  a  division  of  personal  incomes  may  be 
framed  from  the  point  of  view  of  abstract  justice.  If  tax- 
ation is  to  be  utilized  as  a  means  of  administering  rewards) 
to  the  deserving,  the  individual  actively  engaged  in  a  business 
or  profession  should  be  handled  lightly  as  compared  with 

1  Royal  Commission  on  the  Income  Tax,  Report,  1920,  part  ii,  para- 
graphs 109,  no  (p.  25). 


STATE  TAXATION  OF  PERSONAL  INCOMES       [170 

the  unproductive  member  of  society.  Moreover,  the  reci- 
pient of  a  large  investment  income  has,  potentially  or  ac- 
tually, a  greater  ability  to  pay  than  the  recipient  of  an  equi- 
valent amount  of  earned  income,  since  the  productive  pow- 
ers of  the  recipient  of  investment  income  are  presumably 
unemployed  or  employed  in  another  direction.  The  pos- 
sessors of  small  investment  incomes  are  probably  in  many 
cases  in  quite  another  situation.  The  available  evidence 
in  England  shows  that  this  class  is  composed  to  so  great  an 
extent  of  "  widow-and-orphan "  members  and  their  kind, 
incapable  of  becoming  producers,  that  the  payment  of  in- 
come taxes  at  any  but  a  nominal  rate  is  liable  to  result  in 
real  hardship. 

A  difficulty  of  another  kind  presented  itself  early  in  the 
history  of  the  tax  in  North  Dakota,  where  it  was  found  that 
the  amount  of  unearned  income  received  in  the  state  was 
unexpectedly  small,  and  the  revenue  from  the  tax  on  that 
income  correspondingly  insignificant.  It  is  in  such  com- 
munities as  this,  where  agriculture  is  of  prime  importance 
and  industries  are  relatively  undeveloped,  that  the  accumu- 
lation of  capital  is  most  in  need  of  encouragement.  From 
the  point  of  view  of  obtaining  funds  for  the  extension  of 
both  agriculture  and  industry,  the  discovery  of  North 
Dakota  that  the  unearned  income  derived  within  its  borders 
was  small  in  amount  was  a  significant  indication  that  one 
of  the  pressing  needs  of  the  state  was  the  accumulation  of 
its  own  capital,  and  that  efforts  to  develop  that  capital 
should  not  be  unduly  discouraged. 

If  state  income  taxes  are  to  form  a  part  of  such  a  system 
as  that  advocated  by  the  Committee  on  Model  Taxation,  in 
which  the  personal  income  tax  supplements  a  business  tax: 
and  a  tax  upon  tangible  personal  property,  there  is  addi- 
tional taxation  upon  the  sources  from  which  investment  or 
funded  incomes  are  derived,  and  attempts  at  further  dif- 


MODERN  INCOME  TAX  METHODS 

ferentiation  may  be  unnecessary.  Differentiation  produced 
in  this  way  seems  easier  of  accomplishment  at  the  present 
time,  especially  from  the  administrative  point  of  view, 
than  that  brought  about  by  applying  two  separate  scales  of 
rates.  It  is  also  probably  less  onerous  in  its  effects  upon  the 
recipients  of  small  unearned  incomes  than  the  methods  now1 
employed  in  Massachusetts  and  North  Dakota.  Possibly 
the  time  will  come  when  such  a  plan  as  that  which  has  been 
suggested  in  England,  the  diminishing  of  earned  income  by 
one-tenth  for  purposes  of  taxation,  will  seem  both  practic- 
able and  just;  but  before  that  step  is  taken  the  incidence  of 
the  tax  upon  tangible  property  as  employed  in  the  United 
States  should  be  determined  as  accurately  as  possible  and 
carefully  described,  so  that  the  amount  of  differentiation 
effected  through  that  means  alone  may  'be  clearly  understood. 

2.  Exemptions  and  deductions 

State  income  taxes,  like  the  federal  income  tax,  are  ordin- 
arily computed  with  reference  to  a  number  of  exemptions 
and  deductions.  These  two  terms  are  used  with  little  strict- 
ness in  some  of  the  less  carefully  framed  state  laws,  but 
it  is  usually  understood  that  the  word  "  exemptions  "  should 
be  applied  to  those  parts  of  income  which  are  not  subject  to 
taxation  on  account  of  individual  and  family  responsibili- 
ties and  to  other  kinds  of  income,  such  as  the  proceeds  of  life 
insurance  policies  and  interest  on  bonds  o<f  the  United 
States,  which  for  a  variety  of  reasons  should  be  left  out  of 
account  in  ascertaining  the  gross  income  of  the  taxpayer; 
while  the  term  "  deductions "  should  be  applied  to  those 
subtractions  from  the  gross  income  received  which  are  per- 
mitted on  account  of  expenditures  incurred  for  such  pur- 
poses as  carrying  on  business  and  the  payment  of  taxes. 
The  term  "  offset "  is  used  merely  to  indicate  the  credit 
given  on  the  taxpayer's  bill,  in  a  few  states  only,  for  other 


STATE  TAXATION  OF  PERSONAL  INCOMES 

taxes  paid.  This  credit  has  been  limited  almost  without 
exception  to  one  for  personal  property  tax  payments. 

The  amounts  of  personal  income  exempted  from  taxation 
under  the  various  state  laws  show  a  great  lack  of  unifor- 
mity, and  the  nature  of  the  exemptions  permitted  exempli- 
fies in  another  way  the  chaotic  condition  of  income  tax 
principles  in  this  country.  Attempts  to  follow  the  federal 
scheme  of  exemptions  have  been  made  in  every  state  in 
which  general  income  tax  laws  have  been  passed  since  1913, 
the  date  of  the  first  federal  income-tax  law,  but  on  account 
of  later  changes  in  the  federal  law  the  results  have  been 
confusing.  The  first  federal  law  provided  for  the  exemp- 
tion of  $3,000  for  the  individual  or  $4,000  if  the  tax- 
payer was  a  married  person  and  living  with  the  spouse. 
In  1916  a  further  allowance  of  $200  for  each  child  was 
granted  to  the  head  of  a  family.  When  the  law  was 
amended  in  1917  for  the  purpose  of  providing  additional 
war  revenue  the  exemptions  were  lowered  to  $1,000  for 
single  and  $2,000  for  married  persons.  In  1918  the  credit 
of  $200  for  each  child  was  extended  to-  cover  other  depen- 
dents. 

The  income  tax  laws  of  Wisconsin  and  Mississippi,  which 
were  adopted  before  the  enactment  of  a  federal  income  tax 
law,  illustrate  the  differences  of  terms  which  are  in  part 
responsible  for  the  varying  degrees  of  success  with  which 
state  income  tax  laws  have  met.  In  Wisconsin  the  per- 
sonal exemptions  were  fixed  at  $800  for  single  and  $1,200 
for  married  persons,  with  $200  for  each  dependent.  These 
amounts  are  now  considered  remarkably  low,  particularly 
in  view  of  the  price  changes  which  have  since  $ome  about, 
but  they  were  originally  fixed  with  great  care  and  with  a 
view  of  obtaining  direct  personal  contributions  toward  the 
expenses  of  state  and  local  government  from  every  citizen 
of  taxpaying  ability.  The  Mississippi  exemption  limit 


J73]  MODERN  INCOME  TAX  METHODS  173 

was  fixed  at  $2,500,  without  regard  to  the  marital  status  of 
the  taxpayer,  showing  a  lack  of  consideration  for  taxpaying 
ability  which  was  certain  to  create  dissatisfaction.  By  1915 
the  federal  law  was  in  operation,  and  Oklahoma  naturally 
adopted  its  plan  of  exemptions  in  the  essentials,  although 
Oklahoma  increased  the  child  exemption  to  $500  in  the 
case  of  persons  engaged  solely  in  acquiring  an  education. 
According  to  the  Massachusetts  law,  passed  in  1916,  busi- 
ness incomes  were  distinguished  from  three  other  types  of 
income  and  taxed  separately.  Possibly  for  this  reason  a  new; 
set  of  exemptions,  $2,000,  $2,500,  and  $250  additional  for 
children  under  18,  was  chosen  in  that  state.  Missouri's  first 
law,  in  1917,  followed  along  the  federal  lines,  necessitating 
a  change  to  lower  exemptions  when  the  federal  law  was 
revised,  a  change  which  Missouri  made  in  1919.  The 
second  state  which  passed  a  personal  income  tax  law  in 
1917,  Delaware,  at  first  specified  merely  $1,000  as  the  in- 
dividual exemption,  without  regard  to  the  marital  con- 
dition of  the  taxpayer,  but  the  state  law  was  changed  to 
correspond  to  the  federal  law  in  1919.  In  the  relatively 
unimportant  revisions  which  were  made  by  Virginia  in 
1918  and  North  Carolina  in  1919,  it  was  apparently  not 
considered  necessary  to  change  the  exemptions  to  corre- 
spond with  those  of  the  federal  law.  The  new  laws  passed 
in  1919,  which  uniformly  follow  the  federal  system  of  per- 
sonal exemptions,  reflect  the  spread  of  the  realization  that 
the  federal  exemptions  are  reasonable  and  workable  and 
that  a  failure  to  conform  to  them  introduces  an  unnecessary 
complication  in  the  administration  of  the  various  laws. 
These  new  laws  were  those  of  New  York,  North  Dakota, 
and  New  Mexico.  The  Alabama  law  which  was  passed  in 
the  same  year  but  was  subsequently  declared  unconstitu- 
tional was  constructed  along  the  same  lines  with  the  ex- 
ception of  the  fact  that  $300  instead  of  $200  was  allowed 
for  each  dependent. 


STATE  TAXATION  OF  PERSONAL  INCOMES 

The  differences  in  the  amounts  of  personal  income  ex- 
empted in  the  various  states  result  in  a  variation  of  the  tax1 
burden  which  in  its  effect  is  like  that  of  an  actual  differ- 
ence in  rates  of  taxation  upon  small  incomes.  Two  steps 
which  are  immediately  desirable  are  the  lowering  of  the 
limits  in  several  of  the  states  and  a  movement  in  the  direc- 
tion of  greater  uniformity.  The  Committee  on  a  Model; 
System  of  State  and  Local  Taxation,  which  is  working  for 
uniformity  along  with  an  adaptation  of  state  and  local 
systems  of  taxation  to  present-day  economic  conditions, 
embodied  in  its  preliminary  report  the  suggestion  that  $600 
for  single  persons  and  $1,200  for  married  persons,  with 
$200  for  each  dependent,  with  a  possible  total  limited  to 
$1,800,  were  the  maximum  exemptions  which  should  be 
granted  (September,  1918).  The  principal  reasons  for 
suggesting  the  taxation  of  incomes  smaller  than  those  taxed 
by  any  of  the  states  at  the  time  when  the  report  was  made 
was  the  committee's  conviction  that  under  a  democratic 
form  of  government  as  few  people  as  possible  should  be 
exempted  from  the  necessity  of  making  a  direct  personal 
contribution  towards  the  support  of  the  state.  In  the  draft 
of  a  personal  income  tax  law  which  the  same  committee1 
published  two  and  one-half  years  later *  the  exemptions 
were  set  at  $1,000  and  $2,00x3,  with  $200  additional  for 
each  dependent,  like  those  of  the  federal  income  tax  law. 
In  view  of  the  condition  of  affairs  in  the  United  States  with 
regard  to  state  and  federal  income  taxes,  the  later  decision 
of  the  committee  contains  the  more  workable  exemptions. 
It  is  true,  as  the  committee  urged  in  its  preliminary  report, 
that  a  democratic  form  of  government  implies  direct 
personal  responsibility  for  support  on  the  part  of  all  who* 

1  Bulletin  of  the  National  Tax  Association,  vol,  vi,  no.  4  (Jan.,  1921), 
pp.  102- 1 12. 


MODERN  INCOME  TAX  METHODS  175 

are  able  to  contribute.  It  as  also  true,  as  the  British 
Royal  Commission  which  investigated  the  subject  of  a  low 
exemption  limit  in  Great  Britain  in  1919  was  forcefully  in- 
formed, that  a  low  exemption  limit  for  personal  income 
taxes  makes  possible  light  taxes  in  other  forms  which  affect 
the  same  class  of  people.  Moreover,  a  high  exemption  of 
personal  incomes  operates  so  that  many  sections  and  locali- 
ties pay  almost  no  income  tax,  and  sectional  and  class  an- 
tagonisms are  correspondingly  intensified.  At  the  same 
time  the  effort  to  make  the  exemptions  so  low  that  all  per- 
sons with  taxpaying  ability  contribute  to  the  government 
under  which  they  live  should  not  foe  carried  so  far  that  the 
result  is  the  taxation  of  persons  who  are  already  at  the 
minimum-of -subsistence  level. 

It  is  plain  that  the  exemptions  permitted  by  the  federal 
law  are  not  high,  especially  in  view  of  the  recent  changes  in 
the  price  levels  for  necessities.  The  individual  exemption 
of  $1,000  corresponds  to  $500  or  $600  before  the  outbreak 
of  the  European  War.  The  imposition  of  an  income  'tax 
on  amounts  less  than  $1,000  would  almost  certainly  arouse 
dissatisfaction  with  the  tax  which  would  more  than  cancel 
the  rather  vague  benefits  of  forcing  persons  with  low  in- 
comes to  make  direct  contributions  to  the  support  of  the 
government  under  which  they  live.  Whatever  tax  burden 
is  carried  by  the  poorest  people  in  the  various  cities  and 
states  is  carried  almost  unconsciously,  and  no  theoretical 
justification  of  direct  taxpaying  would  be  acceptable.  The 
vote  of  the  Soifth  Wales  miners  against  the  low  exemption 
limit  retained  in  Great  Britain  through  1919,  a  time  of 
rapidly  rising  costs,  is  a  case  in  point. 

The  cost  of  collection  of  the  taxes  on  small  incomes, 
taxes  which  are  actually  nominal  in  character,  is  another 
point  which  should  be  taken  into  consideration.  Figures 
for  the  cost  of  collection  on  the  various  classes  of  income 


STATE  TAXATION  OF  PERSONAL  INCOMES       [176 

are  not  available  in  this  country,  for  either  federal  or  state 
taxes;  but  an  estimate  to  the  effect  that  one-half  of  the 
collections  on  the  incomes  just  above  $1,000  are  eaten  up 
by  administrative  expenses  might  prove  to  be  correct. 

Although  a  large  proportion  of  the  federal  income  tax 
receipts  come  from  the  Middle  Atlantic  and  New  England 
states,  the  federal  exemptions  are  so  low  that  little  actual 
regional  immunity  from  the  operation  of  the  income  tax 
exists.  It  is  difficult  and  unsatisfactory  to  attempt  to  fix 
a  point  on  the  scale  of  incomes  which  means  the  avoidance 
of  the  irritation  and  expense  of  very  low  exemptions  and 
at  the  same  time  freedom  from  the  sectional  and  class  dis- 
tinctions of  high  exemptions,  but  in  view  of  all  the  issues, 
$1,000  and  $2,000,  as  permitted  under  the  federal  law,  seem 
fairly  satisfactory.  From  the  point  of  view  of  administra- 
tion the  advantages  of  uniformity  are  great.  If  the  same 
individuals  are  taxable  under  state  and  federal  laws,  the 
returns  are  made  with  less  confusion  to  the  taxpayer,  and 
greater  opportunity  for  getting  accurate  results  and  detect- 
ing evasion  on  the  part  of  the  state  administration. 

If  the  tendency  towards  uniformity  in  exemptions  which 
showed  itself  in  the  state  income  tax  legislation  of  1919  con- 
tinues, many  of  the  inequalities  of  tax  burden  on  those  with 
small  incomes  will  be  wiped  out.  These  inequalities  are 
most  conspicious  when  the  three  states  which  have  made 
the  greatest  financial  success  oi  the  income  tax  are  compared. 
New  York,  with  its  similarity  to  the  federal  system,  Massa- 
chusetts with  the  separate  taxation  of  four  kinds  of  income 
and  a  high  exemption  limit  for  business  incomes,  and  Wis- 
consin with  an  unusually  low  exemption  limit,  illustrate  the 
haphazard  manner  in  which  the  state  taxes  have  developed. 
In  Wisconsin,  where  the  general  payment  of  the  income 
tax  by  all  classes  of  citizens  has  been  accepted  with  a  fair 
degree  of  equanimity,  there  is  already  talk  of  a  change. 


377]  MODERN  INCOME  TAX  METHODS 

The  tax  commission  of  that  state  reports  that  "there  is 
warrant  for  an  increase  in  the  family  exemptions  under 
present  economic  conditions/' x  but  refrains  from  urging 
it  or  recommending  it  to  the  legislature. 

A  tendency  on  the  part  of  the  states  to  recognize  an  obli- 
gation to  encourage  education  is  beginning  to  show  itself 
in  the  terms  of  the  exemption  provisions.  Oklahoma, 
which  ordinarily  allows  $200  to  the  taxpayer  for  each  per- 
son dependent  upon  him,  increases  the  sum  to  $500  in  cases 
in  which  "  such  dependent  is  engaged  solely  in  acquiring  an 
education."  The  Massachusetts  tax  commissioner,  in  his 
report  for  1919,  called  attention  to  the  fact  that  the  age 
limit  of  1 8  for  children  for  whom  exemption  might  be 
claimed,  while  desirable  from  an  administrative  point  of 
view,  operated  harshly  against  moderately  circumstanced 
merchants  and  relatively  low-salaried  professional  men  who 
were  financing  one  or  more  boys  or  girls  through  a  college 
course.  The  commissioner  suggested  the  consideration  of 
an  age  limit  of  211  for  this  reason,  and  promised  the  pre- 
sentation oi  statistics  showing  the  effect  of  such  a  change 
upon  the  revenue. 

The  question  of  greater  flexibility  in  family  exemption 
has  received  little  attention  in  this  country.  In  view  of  the 
thorough-going  attempts  which  have  been  made  to  make 
due  allowance  for  the  various  ways  in  which  business  ex- 
penses are  incurred  and  the  various  forms  in  which  they 
may  appear,  it  is  not  unlikely  that  a  corresponding  attempt 
may  soon;  be  made  to  allow  for  the  vicissitudes  of  family 
life.  A  beginning  was  made  when  the  exemptions  for 
dependents  under  the  Wisconsin  law  were  made  contingent 
in  each  case  upon  the  dependent's  being  "  actually  supported 
and  entirely  dependent  "  upon  the  taxpayer  for  his  support.' 

3  Report,  1920,  p.  42. 

1  Laws  of  Wisconsin,  1913,  ch.  720. 


I78        STATE  TAXATION  OF  PERSONAL  INCOMES 

That  is,  the  state  of  affairs  within  the  family  with  regard  to 
actual  support  was  taken  into  consideration  in  the  computa- 
tion of  the  tax.  Oklahoma's  enlargement  of  the  exemption 
from  $200  to  $500  "while  such  dependent  is  engaged 
solely  in  acquiring  an  education  "  is  a  second  step,  marking 
as  it  does  a  legal  recognition  of  the  way  in  which  the 
energies  of  the  dependent  are  used  and  the  expenses  for 
which  the  taxpayer  may  be  expected  to  become  liable  on 
his  account,  as  well  as  the  degree  of  dependency.  Another 
step  might  conceivably  be  the  extension  of  exemptions  or,. 
rather,  the  allowance  of  deductions  for  extraordinary  ex- 
penses incurred  for  reasons  other  than  acquiring  an  educa- 
tion, such  as  serious  or  prolonged  illness.  Another  pos^ 
sibility  is  that  of  allowing  exemptions  for  persons  partially 
dependent  for  support  upon  the  taxpayer.  The  general  im- 
pression among  the  taxpayers  with  small  incomes  that  tax- 
payers who  share  the  burden  of  the  support  of  aged  parents, 
for  example,  are  unjustly  discriminated  against  in  favor  of 
those  who  bear  the  whole  burden  of  dependents  will  almost 
certainly  find  some  reflection  in  future  legislation. 

Several  other  classes  of  exemptions  have  been  permitted 
under  the  various  state  income  tax  laws,  but  with  even 
less  uniformity  than  the  family  exemptions.  Massachu- 
sets  exempfcioq.^  from  the  operation  oi  the  personal  income 
tax  dividends!  from  Massachusetts  corporations),  incomq 
from  real  estate  wherever  situated,  and  interest  on  deposits 
in  Massachusetts  savings  banks,  Wisconsin  and  New 
Mexico  accomplish  the  same  result  in  a  more  limited  way 
by  exempting  income  from  the  securities  of  corporations 
which  pay  an  income  tax  to  the  state.  Inheritances  proper 
are  usually  exempted,  although  the  income  from  the  pro- 
perty represented  is  ordinarily  >taxabla  Life  insurance 
payments  and  amounts  received  from  workmen's  compen- 
sation awards  are  also  ordinarily  exempt. 


MODERN  INCOME  TAX  METHODS  179 

One  of  the  most  puzzling  questions  which  has  been  in- 
volved in  the  determination  of  net  income,  and  a  question 
which  is  for  that  reason  closely  associated  with  that  of  pro- 
per exemptions,  is  concerned  with  the  treatment  of  stock 
dividends.  Beginning  in  1916  the  federal  laws  required 
the  inclusion  of  stock  dividends  in  gross  income,  an  example 
which  was  followed  by  the  states.  Economists  have  gener- 
ally agreed  that  the  receipt  for  a  stock  dividend  is  not  the 
receipt  of  an  additional  amount  of  income,  but  is  merely  a 
change  in  the  form  of  the  recipient's  capital.1 

According  to  a  decision  of  the  United  States  Supreme 
Court  rendered  on  March  8,  1920,*  a  bona  fide  stock  divi- 
dend is  not  "  income  "  within  the  meaning  of  the  Sixteenth 
Amendment.  The  definition  of  income  adopted  by  the 
court,  namely  "  income  may  be  defined  as  the  gain  derived 
from  capital,  from  labor  or  from  both  combined,  provided  it 
would  be  understood  to  include  profit  gained  through  the 
sale  or  conversion  o<f  assets  "  was  interpreted  by  the  court 
to  exclude  "  a  growth  or  increment  of  value  in  the  invest- 
ment." The  decision  was  reached  by  a  vote  of  five  to 
four.  Federal  and  state  laws  and  administration  were  ad- 
justed as  rapidly  as  possible  so  as  to  conf  orm  to  the  decision, 
and  as  a  result  stock  dividends  are  not  now  noted  on  in- 
come tax  returns  as  a  part  of  gross  income. 

All  of  the  states  allow  numerous  deductions  from  grossi 
income  in  the  determination  of  net  taxable  income.  These 
deductions  are  coming  more  and  more  to  conform  to  those 
permitted  under  the  federal  income  tax  legislation.  The 

1 E.  R.  A.  Seligman,  "Are  Stock  Dividends  Income?",  American 
Economic  Review,  vol.  ix,  no.  3  (Sept.,  1919),  p.  517;  F.  R.  Fairchild, 
"  The  Stock  Dividends  Decision,"  Bulletin  of  the  National  Tax  Asso- 
ciation, vol.  v,  no.  7  (April,  1920),  p.  209. 

2  Eisner  v.  Macomber,  United  States  Supreme  Court,  no.  318 — Octo- 
ber Term,  1919  (March  8,  1920),  40  Sup.  Ct  189. 


Ig0       STATE  TAXATION  OF  PERSONAL  INCOMES       [180 

most  common  items  are  those  for  the  expenses  of  carrying 
on  the  taxpayer's  business  or  profession.  These  expenses 
are  ordinarily  defined  to  include  wages  and  salaries  paid, 
repairs,  depreciation  allowances,  and  all  other  ordinary  and 
necessary  expenses  for  the  maintenace  of  the  taxpayer's 
business,  as  well  as  losses  and  worthless  debts.  Interest 
on  indebtedness  and  all  taxes  paid  to  any  taxing  jurisdiction 
may  be  deducted  in  most  states.  In  New  York  and  Wis- 
consin gifts  to  educational,  charitable,  religious,  and  certain 
other  non-commercial  organizations,  to  the  amount  of  not 
more  than  15  per  cent  of  the  taxpayer's  net  income  may 
also  be  deducted, — a  provision  which  was  patterned  after 
one  included  in  the  federal  income  tax  law. 

The  deduction  permitted  on  account  of  gifts  made  dur- 
ing the  year  opens  the  way  for  further  deductions  with  re- 
ference to  the  uses  to  which  the  taxpayer's  income  is  put. 
There  are  gifts  other  than  those  to  recognized  charitable, 
educational,  and  religious  institutions  and  organizations 
which  may  be  made  without-  intent  to  lighten  the  burden 
of  the  income  tax.  For  example,  contributions  to  the  sup- 
port of  political  parties  may  have  a  purpose  somewhat 
similar  to  that  O'f  gifts  to  charitable  organizations. 

In  recent  years  the  desirability  of  limiting  in  some  way 
the  deductions  allowable  for  interest  on  indebtedness  has 
received  a  considerable  amount  of  attention.  The  pre- 
liminary report  of  the  Committee  on  Model  Taxation  shows 
a  recognition  of  the  change  in  the  form  of  taxable  income 
which  results  from  the  issue  by  the  federal  government  of 
large  amounts  of  tax-exempt  bonds,  and  contains  a  sugges- 
tion for  the  limitation  of  the  interest  deduction  to  an  amount 
proportional  to  the  income  derived  from  taxable  sources.  In 
the  words  of  the  report  "  if  a  person  derives  one-half  of 
1iis  income  from  taxable  sources  and  one-half  from  tax- 
exempt  federal  bonds,  he  should  be  permitted  to  deduct  only 


r8i]  MODERN  INCOME  TAX  METHODS 

cne-half  of  the  interest  which  he  pays  on  his  indebtedness."  * 
This  provision  was  omitted  in  the  draft  of  a  model  personal 
income  tax  law  which  the  same  committee  published  in 
January,  1921.  In  the  model  law  the  deduction  of  "  in- 
f eres-t  paid  during  the  income  year  on  indebtedness "  is 
recommended  without  any  qualifications  whatsoever.  In 
the  original  New  York  law  a  provision  almost  identical 
vvith  that  in  the  preliminary  report  appeared,2  but  this  was 
amended  in  the  following  year  so  as  to  permit  simply  the 
deduction  of  "  all  interest  paid  or  accrued  during  the  tax- 
able year  on  indebtedness.3  While  it  may  prove  necessary 
and  desirable  to  limit  in  some  way  the  amount  of  interest 
on  indebtedness  which  is  deductible,  it  was  to  be  expected 
that  the  provisions  noted  above  which  related  the  amount 
deductible  to  taxable  income  should  prove  unsatisfactory  and 
unpopular.  The  proportion  of  income  derived  from  tax- 
exempt  sources  obviously  cannot  be  calculated  until  after 
all  deductions  are  made. 

The  kinds  and  amounts  of  taxes  deductible  under  the  laws1 
of  the  various  states  are  very  nearly  the  same.  The  ordin- 
ary procedure  is  to  allow  the  deduction  of  all  taxes  (exclud- 
ing special  assessments)  paid  to  any  jurisdiction.  Wis- 
consin does  not  allow  the  deduction  of  taxes  on  unproduc- 
tive property,  Mississippi  allows  the  deduction  of  ad 
valorem'  taxes  only,  and  Oklahoma  and  Virginia  do  not 
allow  the  deduction  of  taxes  paid  to  the  United  States  or  to 
foreign  governments.  New  York  allows  the  deduction  of 
all  taxes  except  income  taxes.  With  the  deduction  of  taxes 
as  with  many  other  matters  connected  with  the  personal  in- 
come tax,  the  simplest  plan  is  at  the  same  time  the  most 

1  Preliminary  Report,  p.  15. 

a  Laws  of  New  York,  1919,  ch.  627,  sec.  360,  par.  2. 

8  Laws  of  New  York,  1920,  ch.  693. 


l%2        STATE  TAXATION  OF  PERSONAL  INCOMES       [182 

equitable.  The  allowance  of  deductions  for  all  taxes  paid 
to  any  jurisdiction  is  by  far  the  best  procedure.  An  at- 
tempt to  tax  amounts  paid  out  as  taxes  may  seriously  af- 
fect the  justice  with  which  the  whole  scheme  of  taxation 
operates  if  the  rates  are  as  heavy  as  income  tax  rates  of 
recent  years  have  tended  to  become.  For  example,  a  tax 
upon  amounts  paid  into  the  federal  treasury  as  income  taxes 
by  an  individual  who  receives  an  income  of  more  than 
$1,000,000  annually  has  an  effect  not  contemplated  and 
probably  not  desired  by  the  f ramers  either  of  the  federal  or 
the  state  income  tax  laws.  A  point  of  view  very  close  to 
this  is  taken  by  the  Committee  on  Model  Taxation,  which  in- 
corporated in  the  draft  of  a  model  income  tax  law,  a  pro- 
vision allowing  the  deduction  of  all  taxes  paid  to  thd 
United  States  or  to  any  state  or  foreign  country,  with  the 
exception  of  inheritance  taxes  and  income  taxes  paid  in 
the  state  of  residence. 

The  question  o>f  offsets  is  closely  connected  with  the 
question  of  exemptions  and  deductions,  The  recent  history 
of  state  income  taxes  furnishes  only  two  kinds  of  examples 
of  offsets,  those  for  personal  property  taxes  paid  ( permitted 
in  Wisconsin,  North  Dakota,  and  New  Mexico)  and  those 
for  all  property  taxes  paid  (permitted  for  a  short  period  in 
Missouri) .  The  undesirability  of  allowing  these  offsets  has 
been  demonstrated.  The  Wisconsin  tax  commission  has 
for  a  number  of  years  earnestly  besought  the  legislature  to 
do  away  with  the  offset  provision  in  that  state  and  so  to  in- 
crease the  revenue  due  from  the  income  tax  and  abolish 
various  uncontemplated  inequities.  The  offset  as  it  is  used 
in  Wisconsin  subtracts  nearly  one-half  of  the  income  tax 
revenue  and  defeats  the  purpose  of  the  income  tax  in 
principle.  The  Missouri  provision  was  adapted  from  that 
used  in  Wisconsin  and  was  apparently  suggested  by  it,  but 
it  became  unpopular  early  in  its  career  and  it  was  abolished 


.183]  MODERN  INCOME  TAX  METHODS  183 

in  1919.  The  North  Dakota  law  has  been  in  operation  for 
only  a  short  time,  in  the  course  of  which  more  serious  de- 
fects have  caught  the  public  attention,  but  there  is  no  doubt 
that  the  offset  will  prove  to  be  out  of  place  in  that  state  in 
the  same  way  in  which  it  has  proved  to  be  unsatisfactory 
in  other  states.  The  New  Mexico  law  is  still  to  be  tried 
out.  In  states  in  which  such  a  provision  is  in  operation  the 
attempt  of  the  framers  of  the  personal  income  tax  laws  to 
reach  taxpaying1  ability  in  a  more  accurate  fashion  than  was 
possible  under  the' older  personal  property  tax  laws  is  de- 
feated, and  the  purposes  which  it  was  hoped  to  accomplish 
through  the  distribution  of  the  proceeds  of  the  personal  in- 
come tax  are  hindered  to  an  extent  corresponding  to  that 
to  which  the  offset  is  utilized. 

A  much  more  reasonable  and  workable  provision  is  that 
contained  in  the  New  York  income  tax  law  which  allows 
-credit  to  non-residents  of  New  York  on  the  income  tax  bill 
payable  to  New  York  state  for  income  taxes  paid  in  the 
state  or  country  of  residence.  The  New  York  comptroller 
credits  the  amount  of  tax  payable  by  such  non-resident 
in  New  York  sitate  with  suck  proportion  of  the  income  tax 
payable  by  him  elsewhere  as  his  income  subject  to  taxation 
in  New  York  state  bears  to  his  entire  income  upon  which 
the  tax  payable  to  the  other  state  or  country  is  imposed.1 
This  credit  is  allowed  only  if  the  state  or  country  taxing  the 
non-resident  grants  a  substantially  similar  credit  to  resi- 
dents of  New  York  subject  to  income  taxation  under  that 
laws'  of  that  state  or  country,  or  if  the  state  or  country  taxes 
the  income  of  its  own  residents  but  exempts  from,  taxation 
the  personal  incomes  of  residents  of  New  York  state.  This 
provision  represents  an  attempt  to  install  a  scheme  of 
reciprocity  in  crediting  income  taxes  paid  which  will  become 

1  Laws  of  New  York,  1920,  ch.  691. 


1 84       STATE  TAXATION  OF  PERSONAL  INCOMES       [184 

more  and  more  necessary  as  surrounding  industrial  states 
undertake  the  taxation  of  personal  incomes.  Such  a  plan 
should  ultimately  become  unnecessary,  however,  if  the  state 
taxation  of  incomes  becomes  general  and  if  the  states  fol- 
low the  more  equitable  and  reasonable  method  of  taxing 
residents  only,  as  recommended  by  the  Committee  on  Model 
Taxation.  The  New  York  plan  is  merely  an  attempt  to 
insure  a  fair  distribution  of  the  tax  burden  under  present 
conditions  and  those  o>f  the  immediate  future. 

3.  Double  taxation 

The  difficulties  which  arise  from  conflicts  of  tax  juris- 
diction are  an  old  story  in  the  United  States,  where  the 
administration  of  the  general  property  tax  has  been  com- 
plicated by  the  fact  that  personal  property  is  supposed  to  be 
taxed  in  the  place  of  the  taxpayer's  domicile,  but  where  the 
states  in  various  instances  have  adopted  conflicting  proce- 
dures. The  introduction  of  the  taxation  of  personal  in- 
comes by  the  states  has  produced  a  new  set  of  complica- 
tion, which  are  more  troublesome  than  the  old.  In  the 
words  of  Professor  Seligman,  "  the  possible  combinations 
are  almost  terrifying  in  their  complexity." 

A  man  might  reside  in  one  state,  his  legal  domicile  might  be  in  a 
second  state,  his  income  might  be  derived  from  railroad  securities 
which  may  be  in  a  safe  deposit  vault  in  a  third  state ;  the  railway 
itself  may  have  its  chief  office  in  a  fourth  state,  and  its  track  may 
traverse  several  other  states.  Where  and  how  should  this  income 
be  taxed? 

The  regulation  of  double  taxation  is  not  without  prece- 
dent. By  the  terms  of  the  Prussian  law  of  1909  2  the  dis- 
advantages of  double  taxation  were  minimized  by  provid- 

1  E.  R.  A.  Seligman,  The  Income  Tax  (New  York,  1914),  pp.  647,  648, 

2  Seligman,  op.  cit.,  p.  270. 


MODERN  INCOME  TAX  METHODS 

ing  that  when  trade  or  industry  was  carried  on  in  several 
states  only  a  proportional  part  of  the  income  could  be  taxed 
in  any  one  state.  Legislation  of  this  kind  on  the  part  oi  the 
federal  government  in  the  United  States  is  hardly  conceiv- 
able, and  the  necessary  adaptations  will  undoubtedly  have 
to  be  brought  about  through  state  agreements  as  to  unifor- 
mity and  by  following  the  suggestions  of  such  organiza- 
tions as  the  National  Tax  Association's  committee  on  a 
model  system  of  state  and  local  taxation. 

The  provisions  of  the  Massachusetts  law  under  which 
income  from  Massachusetts  corporations  and  from  de- 
posits in  savings  banks  and  all  income  from  real  estate 
wherever  situated  is  exempt  from  taxation  under  the  laws 
taxing  personal  incomes  represent  an  attempt  to  clear  the 
commonwealth  of  Massachusetts  itself  from  the  onus  of  tax- 
ing the  same  income  twice.  The  result  is  an  unsatisfactory 
state  of  affairs  with  regard  to  income  derived  from  sources 
outside  the  state,  The  assumption  is  that  since  the  income 
of  corporations  and  savings-bank  deposits  are  taxed  separ- 
ately by  Massachusetts,  such  income  need  not  be  taxed  again 
in  the  hands  of  the  recipient.  A  tax  known  as  a  "  franchise 
tax"  or  a  "tax  upon  the  corporate  excess"  (i.  e.,  total' 
value  of  the  capital  stock  less  deductions  allowed  by  law) 
is  levied  upon  Massachusetts  corporations,  with  the  addi- 
tion of  a  tax  of  two  and  one-half  per  cent  upon  net  income 
as  returned  to  the  federal  government.  In  the  case  of  Mas- 
sachusetts savings  banks  the  tax  is  assessed  upon  average 
deposits  less  certain  specified  investments  at  the  rate  of 
two  and  one-half  mills  on  the  dollar. 

The  intention  of  the  state  of  Massachusetts  to  refrain 
from  taxing  such  incomes  twice  over  is  justifiable,  and  the 
operation  of  the  law  as  it  applies  to  resident  individuals 
with  respect  to  their  interests  in  domestic  corporations  is 
easily  understood.  The  complications  arise  with  reference 


STATE  TAXATION  OF  PERSONAL  INCOMES       [186 

to  the  taxation  of  income  derived  from  foreign  corpora- 
tions. It  should  be  noted  that  income  from  real  estate 
zvherever  situated  is  exempt  from  taxation  in  the  hands  of 
a  resident  of  Massachusetts.  That  is,  Massachusetts  legis- 
lators recognize  that  real  estate  wherever  situated  is  certain 
to  be  taxed  on  its  value  under  the  laws  of  the  state  in  which 
it  lies,  and  they  consequently  refrain  from  imposing  a 
second  tax.  But  while  income  from  real  estate  situated  in 
Connecticut  or  New  York,  for  example,  is  accordingly  ex- 
empt from  taxation  in  the  hands  of  residents  of  Massachu- 
setts, under  the  Massachusetts  income  tax  law,  the  income 
from  corporations  organized  in  those  states  is  not  similarly 
exempt.  The  assumption  on  the  part  of  Massachusetts  is, 
plainly,  that  such  corporations  are  untaxed  or  are  not  taxed 
to  an  extent  corresponding  to  the  burden  o<f  the  tax  imposed 
upon  Massachusetts  corporations.  The  assumption  is  pro- 
bably  not  a  correct  one,  at  least  as  far  as  it  concerns  the  tax- 
ation of  corporations  in  the  adjacent  states  which  are  most 
important  industrially.  Before  the  Massachusetts  income 
tax  law  was  passed  Connecticut  had  begun  to  tax  the  net 
incomes  of  corporations  at  two  per  cent,  a  tax  from  which 
the  state  derives  a  revenue  of  more  than  $2,000,000  a  year.1 
New  York  taxes  corporations  by  means  of  a  levy  of  four 
and  one-half  per  cent  on  net  earnings,  a  tax  which,  together 
with  other  corporation  taxes  of  less  importance  fiscally, 
yields  over  $30,0x30,000  annually.2 

The  actual  effect  of  the  Massachusetts  legislation  is  to 
discriminate  against  investment  in  foreign  corporations  on 
the  part  of  the  residents  of  the  state  levying  the  income  tax, 
although  investments  in  real  estate  outside  Massachusetts 
are  not  so  discriminated  against.  Even  though  the  number 

1  Connecticut  Tax  Commissioner,  Report,  1918,  p.  52. 

2  New  York  State  Comptroller,  Report,  1921,  p.  xvii. 


187]  MODERN  INCOME  TAX  METHODS  jg/ 

and  amount  of  actual  transfers  of  holdings  from  foreign 
corporations  to  Massachusetts  corporations  which  result 
may  be  small,  the  unfortunate  effects  of  such  discrimination 
upon  interstate  relations  are  not  avoided.  Furthermore, 
the  real  purpose  of  the  taxation  of  income  from  foreign 
corporations  paralleled  by  the  exemption  of  Massachusetts' 
corporations  has  been  very  generally  misunderstood  by  the 
payer  of  the  income  tax  in  Massachusetts  who  has  not  fol- 
lowed the  course  of  the  law  from  the  beginning.  The  im- 
pression has  come  to  prevail  far  too  generally  in  Massachu- 
setts that  the  state  adminstration  is  engaged  in  a  consistent 
attempt  to  force  a  change  in  security  holding  which  will 
benefit  Massachusetts  corporations,  and  even  to  suspect  that 
the  corporations  themselves  are  behind  the  provision. 

The  income  tax  laws  of  Wisconsin  and  New  Mexico, 
under  which  income  derived  from  the  securities  of  corpora- 
tions which  pay  the  state  income  tax  is  exempt  from  tax- 
ation as  personal  income,  are  slightly  less  discriminatory  in 
that  they  do  not  include  provisions  for  the  exemption  of  in- 
come from  real  estate.  At  the  same  time  they  do,  however, 
give  ground  for  the  popular  misunderstanding  which  is 
found  in  Massachusetts  namely,  that  the  taxing  states  in- 
tend to  force  a  withdrawal  of  funds  from  outside  enter- 
prises and  reinvestment  in  domestic  corporations. 

An  effort  towards  uniformity  may  take  any  one  of  three 
directions.  States  which  levy  taxes  on  personal  incomes 
may  continue  to  exempt  income  from  sources  already  taxed 
within  the  state,  while  imposing  taxes  on  all  other  income, 
in  which  case  difficult  questions  of  interstate  relationships 
as  well  as  dissatisfaction  on  the  part  of  the  taxpapers  who 
are  influenced  to  invest  within  the  state  of  residence  are 
sure  to  result.  Second,  exemptions  of  income  may  be  ex- 
tended by  carrying  the  plan  of  Massachusetts'  exemption  of 
income  from  real  estate  wherever  located  to  its  logical  con- 


!88        STATE  TAXATION  OF  PERSONAL  INCOMES 

elusion,  so  that  the  result  is  the  exemption  of  income  the 
source  of  which  is  subject  to  any  considerable  amount  of 
tax  in  any  form  and  by  any  jurisdiction,  a  system  which 
manifestly  would  be  cumbersome,  impracticable,  and  pos- 
sibly entirely  unworkable.  The  most  practicable  program 
is  a  simpler  one.  It  rests  upon  the  assumption  that  double 
taxation  is  harmful  only  when  its  burden  is  felt  unequally 
by  different  individuals  and  different  classes  of  taxpayers. 
With  the  universal  operation  of  the  federal  income  tax  and 
the  growing  use  of  state  taxes  on  personal  incomes,  double 
taxation  is  actually  becoming  increasingly  prevalent.  The 
only  anxiety  which  need  be  felt  is  that  the  taxes  should  be 
fairly  distributed.  The  taxation  oi  corporate  incomes  by 
the  federal  government  is  accomplished  together  with  the 
taxation  of  personal  incomes  without  reference  to  the 
sources  of  those  personal  incomes.  If  the  dates  o<f  taxation 
are  carefully  fixed,  such  a  method  probably  accomplishes  no 
appreciably  unjust  results.  In  the  same  way,  the  taxation 
by  the  individual  states  of  all  personal  income,  whether  or 
not  derived  from  corporate  securities  or  from  real  estate, 
need  arouse  no  opposition  if  the  burden  of  taxation  falls 
with  uniformity  upon  taxpayers  of  equal  ability.  The  state 
of  affairs  with  regard  to  the  taxation  of  corporations  them- 
selves is  changing  so  rapidly  that  the  legislators  of  any  one 
State  which  is  levying  or  contemplating  the  levy  of  a  per- 
sonal income  tax  need  no  longer  assume  that  corporations! 
in  another  state  are  not  adequately  taxed,  Since  that  is 
true,  interstate  relations,  the  willingness  oi  the  taxpayer  to 
contribute,  and  administrative  efficiency  may  best  be  served 
by  disregarding  the  source  of  the  personal  incomes  oi  resid- 
ents. 

The  taxation  of  the  income  of  non-residents  is  quite 
another  problem.  The  general  trend  of  state  personal  in- 
come tax  legislation  seems  to  be  in  the  direction  of  taxing 


-189]  MODERN  INCOME  TAX  METHODS  ^9 

residents  on  their  entire  incomes  and  non-residents  on  that 
part  oi  their  incomes  derived  within  the  state  levying  the 
personal  income  tax.  From  a  general  point  of  view  the 
result  is  a  heavier  rate  of  taxation  upon  persons  of  more 
than  moderate  incomes  whose  sources  of  income  transcend 
state  lines.  For  example,  a  resident  of  Virginia  who  de- 
rives his  income  entirely  from  sources  within  that  state  is 
taxed  only  once  upon  his  income;  but  a  resident  of  Vir- 
ginia who  renders  professional  services  in  New  York 
is  taxed  in  Virginia  upon  all  of  his  income  and  in  New  York 
upon  a  part  of  it  in  addition.  In  case  the  income  is  of  any 
considerable  amount,  the  rates  imposed  are  the  maximum 
rates  of  the  mildly  graduated  scales  in  use  in  the  two  states, 
and  the  income  is  subject  to  a  higher  rate  of  taxation  than 
it  would  have  been  in  Virginia  alone.  Under  the  present 
terms  of  the  Virginia  law  the  taxpayer  would  be  deprived 
of  credit  from  New  York  state  for  personal  income  taxes 
paid  in  Virginia ;  for  although  New  York  grants  a  credit  of 
that  kind  in  certain  instances,  it  would  deny  it  in  this  in- 
stance; for  the  credit  is  granted  only  in  case  the  second 
state  grants  a  .similar  credit  to  residents  of  New  York  or 
exempts  from  taxation  the  personal  incomes  of  residents 
of  New  York. 

By  its  decisions  in  regard  to  the  non-resident  sections  of 
the  Oklahoma  and  New  York  income  tax  laws  the  supreme 
Court  of  the  United  States  has  established  the  right  of  the 
states  to  tax  the  income  of  non-residents  from  sources 
within  the  state  levying  the  personal  income  tax,  provided 
that  such  non-residents  are  not  discriminated  against  in  the 
matter  of  exemptions  and  deductions.  The  question  which 
now  remains  is  this :  with  the  extension  of  the  use  of  state 
income  taxes  which  seems  probable  with  the  next  few 
years,  is  the  taxation  of  the  incomes  of  non-residents  likely 
to  bring  about  serious  inequalities  in  the  tax  burden  between 


STATE  TAXATION  OF  PERSONAL  INCOMES 

persons  whose  income-earning  activities  are  confined  to  one 
state  and  persons  who  earn  income  in  two  or  more  states? 
If  the  levying  O'f  personal  income  taxes  by  the  states  should 
become  general,  the  question  can  only  be  answered  in  the 
affirmative.  In  such  a  case  the  imposition  of  a  tax  upon 
the  net  income  of  residents  only,  as  is  now  done  in  Mas- 
sachusetts, would  be  the  only  way  out  of  the  difficulty ;  for 
in  that  way  every  person  would  be  taxed  upon  his  entire 
net  income  in  his  state  of  residence  and  no  part  of  any 
taxpayer's  income  would  escape.  As  long  as  state  in- 
come taxes  are  used  by  only  a  few  states  it  will  be  possible 
to  continue  the  taxation  of  the  incomes  of  non-residents, 
but  questions  of  law  and  justice  may  be  expected  to  ac- 
cumulate and  increase  in  difficulty  as  long  as  such  tax- 
ation is  attempted. 

4.  The  new  type  of  administration 

Owing  in  large  part  to  the  fact  that  administrative  de- 
fects were  held  responsible  for  the  failure  of  state  income 
tax  laws  before  1911,  the  organizations  of  the  departments, 
commissions,  or  bureaus  which  are  charged  with  the  assess- 
ment and  collection  of  the  personal  income  tax  have  been 
built  up  anew  in  several  of  the  states  within  the  last  few 
years.  The  chief  defect  of  the  older  systems  was  the 
allotment  of  the  work  on  the  personal  income  tax  to  an 
existing  office,  in  most  cases  that  of  the  state  treasurer  or 
state  auditor,  with  the  expectation,  that  the  actual  work  of 
assessment  and  collection  would  be  done  by  the  local  asses- 
sors of  property  taxes.  This  plan  almost  invariably  proved 
unsatisfactory.  The  local  assessors  found  that  the  per- 
sonal income  tax  was  quite  a  different  piece  of  tax  legisla- 
tion from  any  with  which  they  had  been  accustomed  to  deal ; 
some  of  them  objected  to  it  on  principle,  believing  the  per- 
sonal income  tax  to  be  a  superfluous  and  unworkable  sup- 


I9i]  MODERN  INCOME  TAX  METHODS  191 

erstructure  on  the  system  which  they  regarded  as  more 
reliable  and  trustworthy,  that  of  the  general  property  tax; 
and  nearly  all  of  them  were  accustomed  to  deal  with  a  large 
amount  of  evasion  of  personal  property  taxes,  and  made 
ready  for  (and  met)  quite  as  much  evasion  of  personal  in- 
come taxes.  Their  new  duties  of  collecting  personal  in- 
come taxes  were  added  to  heavy  duties  already  undertaken 
in  the  assessment  and  collection  of  property  'taxes.  The 
position  of  the  supervisory  officer  was  in  too  many  case3 
somewhat  similar,  although  the  earlier  income  tax  history 
furnishes  several  refreshing  instances  of  state  officials  who 
labored  with  diligence  and  humor  to  overcome  the  inertia  of 
their  local  representatives.  Much  of  the  opposition  and 
criticism  which  was  aimed  at  the  Wisconsin  income  tax  in 
its  early  days  was  actually  caused,  not  by  an  opposition  to 
the  principle  of  the  taxation  of  personal  incomes  by  the 
states,  but  by  a  conviction  that  the  administrative  difficulties 
could  never  be  overcome. 

The  innovation  in  administrative  methods  was  probably 
the  most  important  element  in  the  Wisconsin  income  tax  law 
of  1911.  The  state  tax  commission  was  given  the  ad- 
ministration oi  the  tax,  with  power  to  divide  the  state  into 
income  tax  districts  and  to  appoint  special  assessors  of  in* 
comes  who  should  be  subject  to  civil  service  requirements. 
The  ordinary  term  of  office  was  fixed  at  three  years  so  that 
the  local  assessors  might  be  given  time  in  which  to  gain 
the  good- will  and  respect  of  the  communities  in  which  their 
work  was  done. 

Although  the  success  of  the  Wisconsin  plan  was  recog- 
nized almost  from  the  beginning,  it  was  several  years  be- 
fore the  same  type  of  administration  was  adopted  in  another 
state.  The  Mississippi  law  of  1912  gave  the  administra- 
tion into  the  hands  of  the  state  tax  commission,  but  the  re- 
gular local  assessors  had  the  assessment  of  income  taxes  in- 


IO/2        STATE  TAXATION  OF  PERSONAL  INCOMES       [192 

eluded  with  their  duties.  The  Mississippi  income  tax  was 
so  badly  planned  from  the  beginning  that  its  failure  can 
hardly  be  laid  at  the  door  of  the  local  assessors,  a  fact 
which  the  state  tax  commission  has  recognized  in  its  fre- 
quent appeals  for  an  entirely  new  inc  /me  tax  act.  In 
Oklahoma  the  administration  of  the  income  tax  law  of 
1915  was  placed  with  the  state  auditor,  with  the  assump- 
tion that  the  local  work  was  to  be  done  by  the  regular  asses- 
sors. The  plan  of  administration  adopted  in  Massachusetts 
in  1916  shows  the  first  real  influence  of  the  Wisconsin 
method,  and  again  in  Massachusetts,  as  in  Wisconsin,  the 
machinery  of  administration  has  been  held  in  large  part 
responsible  for  the  success  of  the  income  tax.  The  state 
tax  commissioner  was  made  the  nominal  head  of  the  income 
tax  system,  but  it  was  suggested  that  he  should  appoint  an 
income  tax  deputy  who  should  have  the  actual  supervision 
and  control  of  the  administration.  The  state  was  divided 
into  income  tax  districts,  with  special  assessors  of  income, 
as  in  Wisconsin.  It  is  noteworthy  that  this  second  state  to 
adopt  centralized  administration  was  also  the  second  state 
to  make  a  financial  success  of  the  law. 

From  the  point  of  view  of  improvement  in  administrative 
methods  the  history  of  the  next  few  years  is  a  repetition. 
The  states  which  followed  the  old  plan  ( Missouri  and  Dela- 
ware with  new  laws  and  Virginia  and  North  Carolina  with 
revisions)  had  only  a  moderate  degree  of  success;  while 
New  York,  with  a  plan  much  like  that  of  Wisconsin,  found 
the  income  tax  a  fruitful  source  of  revenue.  In  New  York 
the  control  was  not  given  to  the  state  tax  commission,  as 
the  f ramers  of  the  original  bill  had  urged,  but,  for  political 
reasons,  to  the  state  comptroller.  The  type  of  administra- 
tion provided  for  was  so  nearly  similar  to  that  which  would 
have  'been  developed  under  the  state  tax  commission  that 
little  anxiety  was  felt  lest  the  results  of  the  tax  should  be 


1 93]  MODERN  INCOME  TAX  METHODS 

less  satisfactory.  A  special  income-tax  bureau  was  for- 
med as  one  of  the  bureaus  of  the  state  comptroller's  depart- 
ment, and  the  state  was  divided  into  income  tax  districts 
with  branch  offices,  as  required  by  law. 

The  North  Dakota  plan  of  administration  was  also 
modelled  on  lines  similar  to  those  of  Wisconsin,  but  on 
account  of  the  various  difficulties  which  the  unusual  form 
of  the  law  has  produced  the  actual  effects  of  the  type  of 
administration  itself  have  been  almost  lost  sight  of.  New 
Mexico,  which  adopted  a  law  which  showed  many  traces  of 
the  more  successful  of  the  state  laws  which  preceded  it,  was 
backward  in  this  particular  respect,  and  give  the  administra- 
tion to  the  state  treasurer  without  the  provision  of  new 
local  officials.  The  new  law  recommended  for  New 
Mexico  by  the  special  revenue  commission  which  reported 
in  1920  would  give  the  central  control  to  an  enlarged  state 
tax  commission. 

The  success  of  Wisconsin,  Massachusetts,  and  New  York 
with  the  personal  income  tax  is  now  widely  known. 
Among  tax  experts  it  is  an  almost  universal  opinion  that 
the  single  most  nearly  indispensable  condition  of  this  suc- 
cess has  been,  centralized  and  specialized  administration. 
The  recommendations  of  the  Committee  on  Model  Taxation 
and  the  terms  of  the  model  law  drafted  by  that  committee 
are  similar  to  those  of  the  New  York  law,  with  the  excep- 
tion of  the  fact  that  the  committee  on  model  taxation  is  in 
favor  of  having  the  tax  administered  by  the  state  tax  com- 
mission. 

5.  Assessment,  collection f  and  review 

The  state  income  tax  laws  show  an  increasing  tendency 
to  follow  the  federal  income  tax  law  in  requiring  the  return 
of  income  by  the  taxpayer,  a  process  usuall  termed  "  self 
assessment."  The  New  York  law  requires  the  filing  of 


I94       STATE  TAXATION  OF  PERSONAL  INCOMES 

returns  similar  to  those  made  to  the  federal  government, 
in  the  same  month  in  which  the  federal  returns  are  due, 
and  accompanied  by  the  amount  of  the  tax  due  as  computed 
on  the  face  otf  the  return.  In  Massachusetts  returns  are  re- 
quired to  'be  made  early  in  the  calendar  year  but  the  tax  is 
subsequently  assessed  and  collected  through  the  office  of  the 
state  tax^  commissioner,  or,  more  accurately,  through  the 
income  tax  deputy.  In  Wisconsin  a  third  method  is  in  use : 
returns  are  made  by  individuals  to  the  local  assessors  of 
incomes  and  the  taxes  assessed  are  certified  to  the  local  as- 
sessors of  property  taxes.  These  taxes  appear  on  the,  local 
tax  rolls  but  are  separately  entered  as  income  taxes.  The 
income  taxes  are  then  paid  at  the  same  time  and  in  the  same 
manner  as  personal  property  taxes.  Among  the  other  states 
which  tax  personal  incomes  the  only  example  of  a  procedure 
like  that  of  New  York  and  the  federal  government  is  that 
specified  in  the  New  Mexico  law  of  1919.  In  all  of  the 
other  states  the  return  of  personal  income  by  the  taxpayer 
is  required  but  the  payment  of  the  tax  is  made  only  after 
the  tax  has  been  assessed  by  designated  officials. 

In  the  states  in  which  income  taxes  are  paid  at  the  same 
time  and  in  the  same  manner  as  other  taxes,  it  is  argued  that 
the  taxpayers  who  do  not  have  bank  accounts  and  for  whom 
the  whole  process  of  paying  a  personal  income  tax  is  a  dif- 
ficult and  annoying  one  have  the  task  facilitated  by  its  com- 
bination with  an  old  and  familiar  process,  that  of  paying 
property  taxes.  There  has  been  no  necessity  for  installing 
this  system  in  Massachusetts  and  New  York,  for  in  those 
states  in  which  the  income  tax  rates  are  not  applied  to  in- 
comes below  the  exemption  limits  o<f  the  federal  law  all  of 
the  individuals  liable  to  the  state  income  tax  are  familiar  with 
the  process  oi  making  out  income  tax  returns  and  of  re- 
mitting to  the  federal  authorities  the  amount  of  the  tax 
due.  In  Wisconsin,  where  individuals  with  incomes  smal- 


I95]  MODERN  INCOME  TAX  METHODS 

ler  than  those  to  which  the  federal  rates  apply  are  reached 
by  the  state  income  tax,  individuals  who  for  the  most  part 
are  unfamiliar  with  ordinary  banking  procedure,  the  other 
method  of  collection  has  probably  averted  many  inaccura- 
cies of  payment.  It  is  probable  that  any  state  income  taxes 
which  may  be  imposed  in  the  near  future  will  not  be  applied 
to  incomes  below  the  federal  exemption  limits- and  it  is 
therefore  to  be  expected  that  the  federal  procedure  of  col- 
lection at  the  time  of  self -assessment  will  be  followed  by 
states  which  pass  new  laws  for  the  taxation  of  personal  in- 
comes, i 

The  extension  of  taxes  on  personal  incomes  and  the  elab- 
oration of  the  rates  of  taxation  to  an  unforeseen  extent  have 
produced  the  necessity  for  making  careful  provision  for  ap- 
peal, review,  and  abatement  of  taxes  wrongfully  assessed. 
Wisconsin  has  established  county  boards  of  review  to  deal 
with  complaints  with  regard  to  the  assessment  of  income 
and  has  designated  the  state  tax  commission  as  the  body 
to  which  appeal  from  the  decisions  of  the  county  board  of 
review  should  be  made.  In  Massachusetts  any  person  ag- 
grieved by  his  assessment  may  appeal  directly  to  the  tax 
commissioner,  and  may  appeal  from  the  decision  of  the  tax 
commissioner  to  a  board  of  appeal,  whose  decision  is  final. 
In  New  York  the  aggrieved  taxpayer  appeals  directly  to 
the  comptroller,  and  if  dissatisfied  with  the  comptroller's 
decision  he  must  appeal  to  the  courts. 

The  method  of  applying  directly  to  the  tax  commission 
or  commissioner  for  revision  o>f  the  tax  assessed  against  the 
taxpayer,  with  the  possibility  of  appeal  to  the  courts  if  the 
decision  is  unsatisfactory  to  the  taxpayer,  is  endorsed  by 
the  Committee  on  Model  Taxation.  The  principal  objection 
which  may  be  raised  against  this  method  is  'the  fact  that 
the  courts  are  not  usually  in  possession  of  all  of  the  details 
necessary  for  the  fairest  consideration  of  income  tax  mat- 


I96       STATE  TAXATION  OF  PERSONAL  INCOMES       [196 

ters  to  as  great  an  extent  as  a  board  of  appeal  created  for 
the  express  purpose  of  dealing  with  disputed  tax  questions. 
If  the  review  is  first  made  by  the  higher  taxing  officials, 
however,  it  is  probable  that  the  important  details  of  the 
matter  under  dispute  will  have  been  adequately  covered. 
The  Massachusetts  law  appears  to  provide  for  the  mo.t 
equitable  method  of  abatement  of  taxes  assessed,  but  the 
period  covered  by  the  operation  of  state  income  taxes  is  still 
so  short  that  no  method  has  yet  conclusively  demonstrated 
its  superiority. 

6.  An  assessment  roll  for  the  income  iax 

A  subject  which  was  not  taken  up  by  the  model  tax  com- 
mittee but  which  has  been  given  a  considerable  amount  of 
•space  in  the  publications  of  the  National  Tax  Association 
is  that  of  an  assessment  roll  for  the  income  tax.1  The  use 
of  the  assessment  roll  for  this  type  of  tax  has  been  most 
strongly  urged  by  Professor  Plehn,  who  regards  it  as  one 
of  the  indispensable  conditions  of  efficient  collection. 
Ordinarily  the  process  of  assessment  for  a  direct  tax  isi 
very  formal  in  character.  With  both  federal  and  state  in- 
come taxes  the  process  has  been  conducted  with  scant 
ceremony.  The  lists  which  are  made  out  are  in  most  in- 
stances compiled  after  the  income  taxes  are  paid.  A  great 
deal  of  uncertainty  as  to  the  actual  amounts  of  tax  payable, 
on  the  part  of  the  collectors  as  well  as  on  the  part  of  the 
taxpayers,  is  the  result.  In  Wisconsin,  where  the  income 
tax  was  introduced  before  the  federal  income  tax  was  in 
existence,  some  of  the  present  difficulties  were  avoided, — 

1  C.  C.  Plehn,  "  An  Assessment  Roll  for  the  Income  Tax,"  Bulletin 
of  the  National  Tax  Association,  vol.  v,  no.  7  (April,  1920),  pp.  231- 
220 ;  "  Assessment  of  Income  Tax,  Once  More,"  Bulletin,  etc.,  vol.  vi, 
no.  6  (iMarchi  1921),  pp.  177-179;  A.  E.  James,  "An  Assessment  Roll 
for  the  Income  Tax,"  Bulletin,  etc.,  vol.  vi,  no.  2  (Nov.,  1920),  pp.  47'S1- 


MODERN  INCOME  TAX  METHODS 


197 


possibly  because  no  other  alternative  but  a  formal  roil  sug- 
gested itself  to  those  who  drafted  the  income  tax  law.  In^ 
cjme  tax  assessments  were  required  to  be  entered  on  the 
regular  local  assessment  rolls,  but  to  'be  separately  classified. 
The  result  has  been  a  more  formal  procedure  than  that  with 
which  the  federal  income  taxpayer  or  other  state  income  tax- 
payers have  become  familiar. 

Few  tax  experts  are  inclined  to  dwell  as  pointedly  upon 
the  disadvantages  of.  the  absence  of  an  assessment  roll  for 
the  income  tax  as  is  Professor  Plehn.  A  recent  comment 
is  as  follows  :  x 

There  is  no  good  reason  why  the  Wisconsin  system  should  not 
work  in  the  federal  Government.  If  the  question  were  a  new 
one,  no  one  would  hesitate  to  choose  between  them.  But  the 
matter  is  a  practical  one  vitally  .affected  by  the  fact  that  in  Wis- 
consin the  state  waits  a  year  for  the  money,  while  under  the  fed- 
eral system  the  money  is  paid  in  part  with  the  return  and  all  of  it 
before  the  return  is  audited. 

This  comment  is  even  more  to  the  point  when  considered 
in  connection  with  the  matter  of  state  collection,  for  in  Newi 
York  the  whole  amount  of  the  tax  due  is  remitted  at  the 
time  when  the  personal  return  is  submitted.  The  settle- 
ment of  the  taxpayer's  exact  liability  before  the  tax  is  paid 
is  undoubtedly  an  end  which  should  be  striven  for,  but  in 
the  generally  confused  condition  of  state  income  taxes  at 
the  present  time  the  difficulties  which  follow  from  this  lack 
are  probably  of  minor  significance. 

7.  Collection  and  information  at  the  source 

Collection  (otherwise  known  as  "  stoppage"  or  "with- 
holding") at  the  source  means  withholding  a  certain 
amount  of  the  sum  otherwise  due  to  individuals  by  the  cor- 

1  James,  op.  cit.,  p.  50. 


IQg        STATE  TAXATION  OF  PERSONAL  INCOMES       [jgg 

porations  or  other  agencies  paying  wages,  salaries,  dividends, 
or  amounts  due  in  any  other  form,  to  facilitate  the  pay- 
ment of  income  taxes  by  those  individuals.  The  system 
has  been  used  extensively  in  connection  with  the  payment  of 
the  income  tax  in  Great  Britain,  where  it  is  believed  that 
the  method  of  stoppage  at  the  source  is  effective  in  pre- 
venting evasions  of  the  income  tax  and  in  producing  ac- 
curate declarations  of  income,  for  the  reason  that  the 
amount  deducted  at  the  source  is  in  many  cases  larger  than 
the  amount  which  should  ultimately  be  paid,  and  in  order 
to  get  the  exemption,  abatement,  or  relief  due  him  the  tax- 
payer must  declare  his  income  in  detail.  The  system  of 
stoppage  at  the  source  is  so  important  in  this;  connection  that 
it  has  been  repeatedly  said  in  Great  Britain  that  it  is  in- 
dispensable to  the  success  o-f  the  income  tax,  and  any  pro- 
vision, however  minor  in  appearance,  which  is  liable  to 
disturb  its  operation  in  any  way  is  attacked  by  the  officials 
of  the  inland  revenue  system. 

Collection  at  the  source  was  attempted  on  a  large  scale  in 
this  country  for  income  taxes  due  under  the  federal  re- 
venue law  of  1916.  Individuals,  corporations,  or  other 
agencies  paying  wages,  salaries,  interest,  rent,  dividends, 
or  other  sums  otf  the  kind  were  required  to  withhold  an 
amount  corresponding  to  the  normal  tax  and  to  remit  that 
amount  to  the  federal  income  tax  officials.  The  plan  proved 
to  be  extremely  unpopular,  largely,  it  is  believed,  on  account 
of  the  delays  in  refunding  to  the  taxpayers  the  amounts 
due  as  abatements.  In  the  federal  law  o>f  1918  withhold- 
ing at  the  source  was  limited  to  amounts  paid  to  non-resi- 
dent aliens,  and  a  system  of  information  at  the  source  some- 
what like  the  plan  already  in  use  in  Massachusetts  *  was  sub- 
stituted. Every  person,  corporation,  or  other  agency  pay- 

1  Laws  of  Massachusetts,  1916,  ch.  269,  sec.  25. 


199]  MODERN  INCOME  TAX  METHODS  199 

ing  another  $1,000  or  more  in  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensation,  remuneration,  emolu- 
ments, or  other  fixed  and  determinate  gains,  profits  and 
income  must  report  such  payments  to  the  federal  income 
tax  authorities.  This  type  of  information  at  the  source  is 
strongly  objected  to  by  certain  critics,  who  regard  it  as| 
productive  of  "  moral  degradation,"  1  but  it  probably  pro- 
duces less  dissatisfaction  than  the  original  effort  to  collect 
the  normal  tax  itself  at  the  source. 

In  Wisconsin  a  partial  requirement  of  information  at  the 
.source  was  made  in  the  provision  that  in  order  to  be  allowed 
to  make  deductions  from  income  for  wages  paid  corpora- 
tion must  furnish  information  concerning  employees  paid 
.$700  or  more  a  year.     The  Massachusetts  law  passed  in 
1916  contained  a  more  inclusive  provision  for  information 
at  the  source :  payments  to  all  persons  to  whom  more  than 
$1,800  a  year  is  paid  in  the  previous  calendar  year  must  be 
reported,  a  provision  which  with  minor  changes  is  still  in 
force.     No  other  state  followed  this  plan  until  1919,  when 
the  New  York  personal  income  tax  law  was  so  framed  as 
to  require  information  at  the  source  for  all  persons  to 
whom  $1,000  or  more  was  paid  in  a  calendar  year.     The 
New  York  law  also  included  profisions  for  withholding  at 
the  source  income  for  personal  services  of  non-residents 
(salaries,  wages,  commissions,  gratituties,  emoluments,  and 
perquisites).     In  the  law  in  its  original  form  the  rate  at 
which  these  taxes  were  to  be  withheld  failed  to  correspond 
to  the  rates  for  the  final  payment  of  the  tax,  and  the  legisla- 
ture was  forced  to  amend  the  law  so  that  the  amounts 
wihheld  should  correspond  to  the  tax  rates  of  one,  two,  and 
three  per  cent  on  the  various  classes  of  taxable  income. 
The  only  other  attempt  to  collect  personal  income  taxes 

1  C.  C  ^Plehn,  Introduction  to  Public  Finance  (4th  ed.,  New  York, 
1920),  p.  283. 


200        STATE  TAXATION  OF  PERSONAL  INCOMES       [200 

at  the  source  has  been  made  by  North  Dakota.  The  laW 
passed  in  that  state  in  1919  provided  for  collection  at  the 
source  of  all  income  taxes  on  dividends,  interest,  profits, 
premiums,  and  annuities.  This  provision  proved  to  be  dif- 
ficult to  administer,  and  it  was  repealed  later  in  the  same 
year. 

As  the  laws  stood  at  the  beginning  of  1921,  collection  at 
the  source  had  failed  everywhere  in  the  United  States  ex- 
cept in  New  York,  where  it  still  remained  to  be  adequately 
tested.  This  almost  universal  failure  in  this  country  pre^ 
sents  a  curious  problem,  for  it  was  assumed  at  the  time  when 
both  federal  and  state  income  tax  laws  were  developing 
rapidly  that  collection  at  the  source  would  prove  as  great 
a  bulwark  of  income  taxation  and  as  great  a  protection 
against  fraud  and  evasion  as  in  Great  Britain.  It  was  even 
argued  that  collection  at  the  source  was  peculiarly  adaptable 
to  the  condition  of  affairs  with  regard  to  incomes  in  the 
United  States,  since  corporate  securities  were  widely  held 
in  this  country  and  wages  and  salaries  paid  largely  through 
corporations.  Possibly  the  root  of  the  trouble  lies  in  the 
rapidity  with  which  the  status  of  the  recipients  of  taxable 
income  changes  in  this  country,  or  possibly  in  the  diimculty 
with  which  individuals  and  corporations  adapt  themselves 
to  administrative  methods  which  involve  "  red  tape."  The 
objections  which  are  heard  most  frequently  have  to  do,  not 
with  the  status  of  incomes  or  with  the  roundabout  nature 
of  the  process,  but  simply  with  the  unfairness  of  shifting 
the  burden  of  the  taxpaying  process  to  the  wrong  shoulders. 
The  Committee  on  Model  Taxation  does  not  advocate  collec- 
tion at  the  source,  for  the  reasons  that  in  its  opinion  such  a 
method  "  presents  serious  administrative  difficulties,  im- 
poses unwarranted  burdens  upon  third  parties  in  respect  of 
transactions  which  strictly  concern  only  the  taxpayers  and 
the  government,  and  not  infrequently  tends  to  shift  the 


201  ]  MODERN  INCOME  TAX  METHODS  2OI 

burden  of  the  tax  to  the  wrong  shoulders."  x  The  com- 
mittee does,  however,  advocate  information  at  the  source 
"  as  is  now  done  under  the  Massachusetts  and  Wisconsin 
income  taxes."  The  experience  of  the  state  of  New  York 
with  collection  at  the  source  at  a  progressive  rate  for  the 
taxes  O'f  non-residents  will  illuminate  the  whole  problem, 
and,  if  successful,  may  yet  influence  other  states  to  under- 
take it. 

8.  The  distribution  of  the  proceeds  of  the  income  tax 

Only  the  three  states  which  depend  on  the  income  tax: 
for  large  sums,  Wisconsin,  Massachusetts,  and  New  York, 
distribute  the  proceeds  of  the  income  tax  direct  to  the 
localities.  In  two  others,  Delaware  and  New  Mexico,  the 
proceeds  of  the  tax  are  devoted  largely  to  educational  pur- 
poses and  distributed  according  to  the  needs  of  the  educa- 
tional institutions.  The  New  Mexico  law  has  been  so  de- 
layed in  its  operation  that  Delaware  furnishes  the  only 
example  of  the  practical  details  of  the  latter  type  of  distri- 
bution. 

The  Wisconsin  plan,  by  which  70  per  cent  of  the  proceeds 
of  the  income  tax  goes  to  the  local  unit  from  which  the 
revenue  was  derived,  20  per  cent  to  the  county,  and  10  per 
cent  to  the  state,  has  the  advantage  o<f  great  simplicity. 
During  the  period  of  rapid  industrial  change  which  followed 
the  outbreak  of  the  European  War  the  surprising  effects 
oi  distribution  according  to  as  simple  a  scheme  as  this  were 
demonstrated.  Unexpectedly  large  amounts  of  revenue 
were  brought  to  localities  which  happened  to  have  pros- 
perous industrial  concerns  located  within  their  borders  but 
which  were  accustomed  to  only  the  most  modest  of  revenues 
and  which  seemed  unable  to  invent  ways  in  which  to  make 

1  Preliminary  Report,  p.  17. 


202        STATE  TAXATION  OF  PERSONAL  INCOMES       [2O2 

use  of  the  amounts  distributed  to  them  by  the  state  income 
tax  offices. 

New  York  has  adopted  an  equally  simple  plan.  The  pro- 
ceeds over  and  above  the  expenses  o-f  administration  are 
divided  equally  between  the  state  and  the  counties  according 
to  assessed  valuation.  The  distribution  in  Massachusetts 
has  been  along  different  lines.  When  the  law  was  first 
passed  it  was  planned  to  distribute  the  proceeds  of  the  in- 
come tax  in  such  a  way  as  to  reimburse  the  local  taxing 
units  for  the  losses  which  they  might  be  expected  to  meet 
through  the  abolition  of  the  personal  property  tax  and  the 
substitution  of  a  tax  on  intangibles  as  a  part  of  the  personal 
income  tax.  The  amount  to  be  paid  to  each  city  or  town 
was  to  be  "  an  amount  equal  to  the  difference  between  the 
amount  of.  the  tax  levied  upon  personal  property  in  such 
city  or  town  in  'the  year  nineteen  hundred  and  fifteen  and 
the  amount,  computed  by  the  tax  commissioner,  that  would 
be  produced  by  a  tax  on  personal  property  actually  assessed 
in  such  city  or  town  for  the  year  nineteen  hundred  and 
seventeen  at  the  same  rate  of  taxation  as  prevailed  therein 
in  the  year  nineteen  hundred  and  fifteen."  Before  the 
proceeds  of  the  income  tax  were  distributed  the  expenses  of 
administration  were  to  be  subtracted.  In  1919  a  scheme 
was  adopted  for  reducing  by  degrees  the  amounts  paid  to> 
the  local  units  as  reimbursement  for  the  losses  through  the 
removal  of  the  personal  property  taxes,  to  expire  after  itsi 
completion  in  1927,  after  which  date  the  amount  to  be  dis- 
tributed and  paid  to  the  cities  and  towns  was  to  be  determined 
in  proportion  to  the  amount  of  the  state  tax  imposed  upon 
each  of  them  in  each  year.1  A  little  later  in  1919  another 
change  was  made,  and  a  scheme  of  reimbursement  in  relation 

1  Laws  of  1916,  ch.  269,  sec.  23. 
1  Laws  of  1919,  ch.  314. 


203]  MODERN  INCOME  TAX  METHODS  203 

to  the  needs  of  the  schools  was  adopted.1  The  plan  included 
the  payment  o-f  lump  sums  to  teachers  and  other  educational 
officials  of  various  grades  of  salary,  and  supplementary 
reimbursements  for  those  cities  and  towns  in  which  the 
assessed  valuation  was  'below  a  certain  ratio  to  the  school 
attendance.  This  plan  was  opposed  on  the  same  grounds  on 
which  such  a  plan  O'f  expenditure  is  usually  opposed  in  any 
locality, — namely,  for  the  reason  that  it  forces  the  urban 
districts  to  pay  for  the  schools  of  the  poorer  and  rural  dis- 
tricts, but  it  was  carried  through. 

The  plan  used  in  Delaware  results  in  the  distribution  of 
the  proceeds  of  the  income  tax  to  the  various  school  dis- 
tricts on  the  basis  of  enrollment. 

The  distribution  o>f  the  yield  of  state  income  taxes  isl 
one  of  the  most  important  problems  connected  with  the 
utilization  of  that  form  of  taxation.  The  interest  in  the 
development  of  the  income  tax  principle  itself  has  been  so 
great  that  this  part  of  the  question  has  been  too  much 
neglected,  with  the  result  that  the  purposes  to  which  the 
product  of  the  tax  may  be  devoted  have  not  been  ade^ 
quately  safeguarded.  The  amusing  excess  of  local  in- 
come in  certain  places  in  Wisconsin  during  the  recent  in- 
dustrial changes  has  already  been  noted.  In  New  York, 
where  the  distribution  to  the  localities  is  made  accord- 
ing to  assessed  valuation,  the  results  are  "  weird  and  mean- 
ingless" according  to  A.  E,  Holcomb,  secretary  of  the 
National  Tax  Association.1  In  states  in  which  the  tax 
has  been  unexpectedly  productive  and  in  which  no  safe- 
guards whatever  have  been  put  around  the  disposition  of 
the  proceeds  of  the  tax  there  has  undoubtedly  been  a  temp- 

1  Laws  .of  1919,  oh.  363. 

1  A.  E.  Holcomib,  "  State  Income  Taxes,"  Bulletin  of  the  National  Tax 
Association,  vol.  vi,  no.  4  (Jan.,  1921),  p.  126. 


204        STATE  TAXATION  OF  PERSONAL  INCOMES        [204 

tation  to  use  the  funds  for  purposes  which  are  not  immed- 
iately urgent. 

Mr.  Holcomb  holds  that  a  distribution  for  educational 
purposes  is  superior  to  the  methods  used  in  Wisconsin  and 
New  York:1 

A  method  of  distribution,  at  once  reasonable  and  having  the 
added  advantage  of  popularity  and  attractiveness  to  the  general 
public  seems  to  us  to  be  educational  purposes.  This  is  so  because 
of  the  preponderating  amount  of  that  expense,  as  compared  with 
other  governmental  expenses.  It  would  readily  absorb  the  yield 
of  the  income  tax,  without  a  suggestion  of  "  surplus  ".  A  measure 
for  such  distribution  is  available  in  the  school  enrollment,  and 
finally,  and  most  important,  the  definite  reflection  in  each  tax  bill 
of  a  sharp  reduction  in  the  largest  item,  would  have  a  marked 
effect  in  the  attitude  of  the  taxpayer  towards  the  tax. 

The  same  results  could  in  large  measure  be  obtained  by  assign- 
ing the  yield  to  the  state  educational  department,  to  be  distributed 
under  its  supervision  as  so-called  "  state  aid."  .... 

The  distribution  of  a  large  part  of  the  proceeds  of  the 
income  tax  to  the  local  units  in  some  way  is  desirable  under 
present  conditions.  The  income  tax  is  intended  as  a  sub- 
stitute for  the  unsatisfactory  personal  property  tax  in  nearly 
all  of  the  states  in  which  it  has  recently  been  adopted  or 
enlarged  in  scope,  and  as  such  a  reimbursement  is  due  to  the 
local  taxing  units  for  those  sums  which,  if  they  did  not 
actually  receive,  they  should  have  received  under  the  old 
system.  The  Committee  on  Model  Taxation  regards  this 
question  of  distribution  as  one  to  which  a  dogmatic  answer 
cannot  be  given,  since  the  local  units  are  relieved  from  a 
part  of  their  tax  burden  in  either  case, — that  is,  they  are 
assisted  if  the  revenue  is  distributed  directly  to  them,  but 
they  are  also  assisted  if  the  proceeds  of  the  income  tax 
are  assigned  to  the  state  treasury  and  are  used  for  general 

1  Holcomb,  op.  cit.,  p,  127. 


205]  MODERN  INCOME  TAX  METHODS  205 

state  purposes,  for  .the  direct  state  tax  is  correspondingly 
lightened.  This  is  undeniably  true,  but  in  this  matter,  as 
in  many  other  instances,  the  actual  reliefs  or  burdens  con- 
ferred through  the  operation  of  taxes  are  extremely  likely 
to  be  assumed  by  the  least  intelligent  of  the  taxpayers  to 
remain  where  they  first  fall.  Hence  a  better  understanding 
on  the  part  of  the  average  taxpayer  of  the  actual  effect  of 
the  income  tax  is  obtained  if  at  least  a  part  of  the  proceeds 
is  distributed  to  the  local  unit  in  which  the  taxpayer  re- 
sides. Furthermore,  the  distribution  should  be  made  with 
such  a  purpose  and  in  such  a  way  that  the  taxpayer  is  made 
conscious  of  the  lightening  of  his  tax  burden.  The  effect  of 
the  actual  process  of  this  distribution  was  in  fact  felt  clearly 
and  with  excellent  effect  upon  the  popular  sentiment  towards 
the  income  tax  when  at  the  close  of  1920  the  New  York  state 
comptroller  made  the  refunds  due  the  localities  under  the 
state  income  tax  law.  The  method  which  the  Committee  on 
Model  Taxation  suggests  in  its  preliminary  report,  that  of  a 
division  of  the  proceeds  of  the  income  tax  in  the  propor- 
tions which  the  state  and  local  expenditures  bear  to  the 
total  state  and  local  expenditure  combined,  is  probably  a 
workable  and  satisfactory  one.  If,  further,  this  method 
is  combined  with  one  by  which  the  details  of  distribu- 
tion are  worked  out  according  to  some  educational  factor, 
as  is  advised  by  Mr.  Holcomb,  the  results  should  be  more 
satisfactory  than  those  now  obtained  in  Wisconsin  or  New 
York. 

9.  Financial  results 

The  productivity  of  the  state  income  tax  under  modern 
conditions  can  be  no  more  vividly  described  than  by  the 
citation  of  New  York's  $37,000,000  in  receipts  from  the 
operation  of  the  tax  on  individual  incomes  in  the  first  year 
of  collection.  When  the  scale  of  incomes  and  of  the  state 


206        STATE  TAXATION  OF  PERSONAL  INCOMES       [2o6 

budget  is  taken  into  consideration  the  financial  results  in 
Wisconsin  and  Massachusetts  are  hardly  less  impressive. 
It  has  been  demonstrated  that  it  is  possible  for  a  state  to 
collect  one-fifth  as  much  as  the  federal  government  collects 
by  means  of  the  income  tax,  to  reap  a  sum  which  is  almost 
equal  to  one- third  of  the  state's  revenue,  and  to  conduct  the 
operations  of  assessment  and  collection  at  a  cost  of 
(approximately)  two  per  cent  on  assessments, — the  record 
of  Massachusetts  with  the  income  tax.  These  facts  are 
significant  in  any  forward  look  over  the  financial  affairs  of 
the  American  states.  The  income  tax  is  not  now  regarded 
as  a  cure-all  for  financial  ills ;  it  is  recognized  that  it  cannot 
properly  occupy  a  position  of  sole  importance  in  the 
taxing  plan  of  a  state,  but  must  foe  fitted  into  a  diversified 
tax  scheme;  but  the  question  of  its  productiveness  and 
economy  is  now  answered,  and  in  that  respect  the  judgment 
of  the  nineteenth  century  has  been  reversed. 

10.  Conclusion 

In  concluding  a  study  of  the  income  tax  in  modern  in- 
dustrial countries  in  1911,  Professor  Seligman  emphasized 
three  lessons  which  might  be  learned  from  the  history  of 
the  income  tax :  first,  the  income  tax  was  coming,  in  the 
United  states  as  elsewhere;  second,  the  tax  worked  better 
from  year  to  year  and  from  decade  to  decade;  and,  third,  its 
success  depended,  almost  more  than  in  the  case  of  any 
other  modern  institution,  upon  administrative  machinery. 
A  survey  o>f  the  ten  years  of  tax  history  which  have  passed 
since  those  words  were  written  brings  added  proof  of  each 
of  the  three  statements,  for  state  income  taxes  in  particular 
as  well  as  for  taxes  of  wider  application.  State  income 
taxes  are  coming, — pushed  to  the  front  by  the  ever-increas- 
ing dissatisfaction  with  general  property  taxes,  by  the  lure 
of  a  large  yield,  and  by  the  willingness  to  experiment  which 


207]  MODERN  INCOME  TAX  METHODS  207 

the  financial  changes  of  the  war  have  brought  about.  From 
year  to  year  improvements  have  been  made  and  the  tax  has 
worked  more  effectively, — as  Massachusetts  has  adapted  and 
improved  the  income  tax  devices  of  Wisconsin  and  as  New 
York  has  seized  upon  both,  utilized  them,  and  moved  a  step 
ahead.  Finally,  the  realization  of  the  prime  importance  of 
workable  administrative  machinery  is  now  nation-wide. 
Under  the  financial  conditions  of  the  present  the  modern 
income  tax  must  be  regarded  as  one  of  the  most  productive 
and  one  of  the  most  satisfactory  sources  of  state  revenue. 


APPENDIX  I 

EXTRACT  FROM  THE  "PRELIMINARY  REPORT  OF  THE  COMMITTEE  APPOINTED 

BY  THE  NATIONAL  TAX  ASSOCIATION  TO  PREPARE  A  PLAN  OF  A 

MODEL  SYSTEM  OF  STATE  AND  LOCAL  TAXATION," 

SEPTEMBER,  1918 

III.  THE  PROPOSED  PERSONAL  INCOME  TAX 

Section  n.  The  first  decision  reached  by  the  committee  was 
that  in  the  proposed  model  system  of  state  and  local  taxation 
there  should  be  a  personal  tax  levied  with  the  exclusive  view  of 
carrying  out  the  principle  that  every  person  having  taxable 
ability  should  pay  a  direct  tax  to  the  government  under  which 
he  is  domiciled.  There  appeared  to  be  four  forms  of  personal 
taxation  which  have  been  employed  for  this  purpose. 

The  first  of  these  is  the  poll  tax.  It  is  evident,  however, 
from  the  nature  of  the  case  that  this  tax  would  be  utterly  in- 
adequate to  accomplish  the  object  in  view,  even  if  levied  at 
graduated  rates,  as  has  sometimes  been  done  in  other  coun- 
tries. It  would  be  so  unequal  and  so  far  inferior  to  the  other 
forms  of  personal  taxation  that  it  cannot  be  deemed  worthy  of 
serious  consideration.  Whether,  as  a  supplement  to  an  ade- 
quate system  of  personal  taxation,  it  might  be  desirable  to  retain 
the  poll  tax  as  a  means  of  insuring  some  contribution  from 
people  owning  no  property  and  having  small  incomes,  the  com- 
mittee preferred  not  to  consider  in  this  report.  It  has  been  our 
desire  to  confine  ourselves  to  main  issues,  and  not  to  undertake 
to  solve  every  minor  problem  of  taxation.  We,  therefore,  say 
nothing  about  the  poll  tax,  except  that  it  is  inadequate  for 
the  purpose  that  we  have  in  view,  and  cannot  be  recommended 
as  an  important  element  in  any  system  of  state  and  local 
taxation. 

The  second  method  of  imposing  the  personal  tax  would  be 
to  levy  a  tax  upon  every  man's  net  fortune,  that  is,  upon  the 
208  [208 


209]  APPENDIX  I  209 

total  of  his  assets  in  excess  of  his  liabilities,  without  exemption 
of  any  kind  of  asset  or  exclusion  of  any  liability.  This  would  not 
mean  a  general  property  tax,  but  a  net  property  tax  such  as  is 
found  in  some  countries  in  Europe.  It  would  be  a  tax  levied 
not  upon  property  as  such,  but  upon  net  fortune  as  a  measure 
of  the  citizen's  personal  liability  to  contribute  to  the  govern- 
ment under  which  he  is  domiciled.  It  would  be  entirely  dis- 
tinct from  any  tax  that  might  be  levied  objectively  upon  prop- 
erty, as  property,  at  the  place  of  its  situs,  and  would  have  to 
be  levied  exclusively  upon  the  property  owner  at  his  place  of 
domicile.  It  would  necessarily  be  levied  at  a  moderate  rate, 
perhaps  $3  per  $1000,  which  would  correspond  approximately 
to  a  six  per  cent  income  tax  upon  investments  yielding  five 
per  cent.  Although  precedents  may  be  found  in  other  coun- 
tries for  such  a  personal  tax  levied  upon  net  fortunes,  the 
committee  has  concluded  that  it  is  not  to  be  recommended  for 
adoption  in  the  United  States.  Such  a  tax  would  raise  the 
difficult  constitutional  question  of  the  right  of  a  state  to  levy 
a  tax  even  upon  the  net  fortune  of  a  citizen  if  that  fortune 
included  tangible  property  located  in  another  commonwealth. 
It  is,  furthermore,  foreign  to  American  experience,  and  would 
certainly  not  lead  us  along  the  line  of  least  resistance.  Since 
the  coming  of  the  federal  income  tax,  it  is  obvious  that  it  is 
easier  for  the  states,  and  more  convenient  for  the  taxpayers, 
to  adopt  income  rather  than  net  fortune  as  the  measure  of  the 
obligation  of  the  citizen  to  contribute  to  the  government  under 
which  he  lives. 

The  third  method  of  personal  taxation  is  what  may  be  called 
a  presumptive  income  tax,  that  is,  a  tax  levied  upon  persons 
according  to  certain  external  indicia  which  are  taken  to  be 
satisfactory  measures  of  taxable  ability.  House  rent  is  the 
index  commonly  used  in  such  presumptive  income  taxes,  and 
a  tax  on  rentals  has  been  proposed  in  times  past  by  special 
commissions  in  Massachusetts  and  New  York.  Such  a  tax 
would  be  comparatively  easy  to  administer,  and  would  raise 
no  difficult  constitutional  questions.  It  would  undoubtedly  be 
better  than  an  income  tax  or  a  tax  on  net  fortunes  if  those 


210  APPENDIX  I  [210 

taxes  were  badly  administered.  But  the  amount  that  a  citizen 
pays  for  house  rent  is  after  all  such  a  very  imperfect  and  inade- 
quate indication  of  his  income  or  fortune  that  the  committee  is 
unwilling  to  recommend  it  to  any  state  in  which  there  is  any 
reasonable  expectation  that  conditions  are,  or  may  presently 
become,  favorable  for  the  introduction  of  a  better  form  of 
personal  tax.  It  appears  that  in  France,  where  the  tax  on 
rentals  has  been  in  continuous  operation  since  the  Revolution, 
there  is  so  little  correspondence  between  house  rents  and  tax- 
able ability  that  in  the  greater  part  of  the  communes  the  taxing 
officials  disregard  to  a  greater  or  less  extent  the  letter  of  the 
law,  and  assess  people  according  to  what  they  appear  able  to 
pay.  The  committee  finds,  therefore,  that  the  tax  on  rentals 
is  not  to  be  recommended  except,  perhaps,  as  a  last  resort 
in  states  where  administrative  and  other  conditions  are  un- 
favorable to  the  introduction  of  any  better  form  of  personal 
taxation. 

There  remains  a  fourth  form  of  personal  taxation,  the  per- 
sonal income  tax.  By  this  is  meant  a  tax  levied  upon  persons 
with  respect  to  their  incomes  which  are  taxed  not  objectively 
as  incomes  but  as  elements  determining  the  taxable  ability  of 
the  persons  who  receive  them.  This  tax  is  better  fitted  than 
any  other  to  carry  out  the  principle  that  every  person  having 
taxable  ability  shall  make  a  reasonable  contribution  to  the  sup- 
port of  the  government  under  which  he  lives.  It  is  as  fair  in 
principle  as  any  tax  can  be ;  under  proper  conditions,  it  can  be 
well  administered  by  an  American  state,  as  Wisconsin  and 
Massachusetts  have  proved;  it  is  a  form  of  taxation  which 
meets  with  popular  favor  at  the  present  time,  and  therefore 
seems  to  offer  the  line  of  least  resistance.  The  committee, 
therefore,  is  of  the  opinion  that  a  personal  income  tax  is  the 
best  method  of  enforcing  the  personal  obligation  of  the  citizen 
for  the  support  of  the  government  under  which  he  lives,  and 
recommends  it  as  a  constituent  part  of  a  model  system  of  state 
and  local  taxation. 

Section  12.  While  it  is  impossible  in  this  report  to  describe 
the  proposed  taxes  in  every  detail,  it  is  essential  that  the 


APPENDIX  I 


211 


committee  should  explain  at  least  in  broad  outlines  the  manner 
in  which  these  taxes  should  be  levied.  In  so  doing  it  will  be 
necessary  to  refer  constantly  to  the  general  principles  pre- 
viously stated,  and  to  adjust  the  details  of  each  tax  in  such  a 
manner  as  to  enable  it  to  carry  into  effect  logically  and  con- 
sistently the  principle  upon  which  it  is  based. 

Since  the  purpose  of  the  personal  income  tax  is  to  enforce 
the  obligation  of  every  citizen  to  the  government  under  which 
he  is  domiciled,  it  is  obvious  that  this  tax  must  be  levied  only 
upon  persons  and  in  the  states  where  they  are  domiciled.  It 
is  contrary  to  the  theory  of  the  tax  that  it  should  apply  to  the 
income  from  any  business  as  such,  or  apply  to  the  income  of 
any  property  as  such.  The  tax  should  be  levied  upon  persons 
in  respect  of  their  entire  net  incomes,  and  should  be  collected 
only  from  persons  and  at  places  where  they  are  domiciled.  It 
should  not  be  collected  from  business  concerns,  either  incor- 
porated or  unincorporated,  since  such  action  would  defeat  the 
very  purpose  of  the  tax. 

At  first  thought  this  proposal  will  doubtless  seem  objection- 
able to  many,  who  will  ask  why  a  state  should  not  tax  all  in- 
comes derived  from  business  or  property  located  within  its 
jurisdiction,  irrespective  of  whether  the  recipients  are  resi- 
dents or  non-residents.  And  if  the  personal  income  tax  were 
the  only  one  proposed,  the  objection  would  be  well  grounded. 
The  committee,  however,  is  under  the  necessity  of  reconcil- 
ing the  conflicting  claims  of  the  states,  and  of  doing  so  in  a 
manner  that  will  avoid  unjust  double  and  triple  taxation  of 
interstate  business  and  investments.  We,  therefore,  propose 
as  the  only  practicable  remedy  a  system  which  comprises  three 
taxes,  each  of  which  is  designed  to  satisfy  fully  and  fairly 
the  legitimate  claims  of  our  several  states.  We  are  elsewhere 
providing  methods  by  which  property  will  be  taxed  where  lo- 
cated and  business  will  be  taxed  where  it  is  carried  on.  At  this 
point,  we  are  dealing  exclusively  with  a  personal  tax  designed 
to  enforce  the  right  of  our  states  to  tax  all  persons  domiciled 
within  their  jurisdictions;  and  we  are  merely  insisting  that, 
in  enforcing  this  claim,  the  states  shall  act  consistently,  and 


212  APPENDIX  I  [212 

shall  confine  personal  taxation  to  persons  and  attempt  to  levy 
it  only  at  the  place  of  domicile.  If  the  personal  income  tax 
is  levied  in  any  other  way,  it  will  simply  reproduce  and  per- 
petuate the  old  evil  of  unjust  double  taxation  of  interstate 
property  and  interstate  business. 

The  second  detailed  recommendation  we  have  to  make  is 
that  the  personal  income  tax  shall  be  levied  in  respect  of  the 
citizen's  entire  net  income  from  all  sources.  Under  existing 
constitutional  limitations,  of  course,  interest  upon  the  bonds 
of  the  United  States  and  the  salaries  of  federal  officials  cannot 
be  taxed  by  the  states,  but  we  recommend  that  all  other  sources 
of  income  be  subject  to  the  income  tax  without  exception  or 
qualification.  We  are  aware  that,  under  the  unreasonable  and 
unworkable  requirements  of  the  general  property  tax,  it  has 
appeared  desirable  in  times  past  to  exempt  state  and  local 
bonds  from  taxation,  to  exempt  real-estate  mortgages,  and  to 
grant  various  other  exemptions.  All  such  exemptions  are  in- 
consistent with  the  theory  of  the  tax  we  here  propose,  and 
should  be  discontinued  as  rapidly  as  the  circumstances  of  each 
case  permit.  Against  the  policy  which  led  to  these  exemptions 
under  the  general  property  tax  we  Mere  offer  no  criticism.  But 
we  are  now  dealing  with  a  tax  which  is  designed  to  be  a  part  of 
a  new  system  of  taxation,  and  it  is  evident  that  none  of  the 
considerations  which  led  to  the  exemptions  created  under  the 
general  property  tax  are  applicable  to  a  personal  income  tax 
levied  upon  the  principle  we  here  advocate.  The  personal  obli- 
gation of  the  citizen  to  contribute  to  the  support  of  the  govern- 
ment under  which  he  lives  should  not  be  affected  by  the  form 
his  investments  take,  and  to  exempt  any  form  of  investment  can 
only  bring  about  an  unequal,  and  therefore  an  unjust  distribu- 
tion of  this  tax.  Our  reasoning  applies,  of  course,  to  the 
exemption  which  agencies  of  the  federal  government  now  en- 
joy. But  that  is  a  matter  which  is  beyond  the  control  of  the 
states,  and  for  the  purposes  of  this  report  it  will  be  considered 
a  fixed  datum  which  must  be  accepted.1 

1  We  here  follow  the  view  that  has  long  prevailed  concerning  existing 


213]  APPENDIX  I  213 

Our  third  specific  recommendation  is  that  the  personal  in- 
come tax  should  be  levied  upon  net  income  defined  substan- 
tially as  a  good  accountant  would  determine  it.  We  submit 
no  formal  definition  at  this  time,  and  content  ourselves  with 
referring  to  the  provisions  of  the  Wisconsin  and  the  Massa- 
chusetts income  taxes.  Our  recommendation  means  that  oper- 
ating expenses  and  interest  on  indebtedness  must  be  deducted, 
but  we  wish  to  call  attention  to  the  fact  that  the  issue  by  the 
federal  government  of  large  amounts  of  bonds  which  are 
exempt  from  local  taxation  will  make  it  necessary  for  the  states 
to  limit  the  interest  deduction  to  an  amount  proportional  to 
the  income  which  the  taxpayer  derives  from  taxable  sources. 
This  would  mean  that  if  a  person  derives  half  of  his  income 
from  taxable  sources  and  one-half  from  tax-exempt  federal 
bonds,  he  should  be  permitted  to  deduct  but  one-half  of  the 
interest  that  he  pays  upon  his  indebtedness.  Any  other  pro- 
cedure will  tend  to  make  the  personal  income  tax  a  farce  in 
many  cases  and  will  give  occasion  for  legitimate  complaint. 

The  fourth  recommendation  relates  to  the  exemption  of  small 
incomes.  The  committee  believes  that  the  amount  of  income 
exempted  from  the  personal  income  tax  should  not  exceed 
$600  for  a  single  person  and  $1200  for  a  husband  and  wife, 
with  a  further  exemption  of  $200  for  each  dependent  up  to  a 
number  not  to  exceed  three.  This  would  give  us  a  maximum 
exemption  of  $1,800  for  a  family  consisting  of  husband,  wife, 
and  three  children  or  other  dependents.  We  recognize,  how- 
ever, that  conditions  may  well  differ  in  various  states,  and  have 
decided  to  make  no  specific  recommendations  about  the  amount 
of  the  exemptions  granted  to  persons  having  small  incomes. 
We  limit  ourselves  to  the  above  statement  of  the  maximum 
exemptions  that  should  be  granted  and  the  further  observation 

restrictions  on  the  taxing  power  of  the  states.  In  two  recent  cases 
(Peck  v.  'Lowe  and  U.  S.  Glue  Co.  v.  Oak  Creek,  247  U.  S.)  the  court 
has  developed  a  doctrine  which  may  justify  the  belief  that  a  net  income 
tax,  levied  upon  state  officials  along  with  all  other  persons,  with  respect 
to  their  entire  net  incomes,  might  not  be  held  to  be  a  tax  upon  agencies 
of  the  federal  government,  and  therefore  forbidden  by  federal  decisions. 


214  APPENDIX  I  [2I4 

that,  under  a  democratic  form  of  government,  it  is  desirable 
to  exempt  as  few  people  as  possible  from  the  necessity  of 
making  a  direct  personal  contribution  toward  support  of 
the  state.1 

Our  fifth  recommendation  is  that  the  rate  of  the  income  tax 
shall  be  the  same  for  all  kinds  of  income,  that  is,  that  it  shall 
not  be  differentiated  according  to  the  sources  from  which 
income  is  derived.  If  the  tax  stood  by  itself,  a  strong  argu- 
ment could  be  made  for  imposing  a  higher  rate  upon  funded 
than  upon  unfunded  incomes.  But  the  tax  is,  in  fact,  designed 
to  be  part  of  a  system  of  taxation  in  which  there  will  be  a  tax 
upon  tangible  property.  Under  this  system  there  will  be  heavier 
taxation  of  the  sources  from  which  funded  incomes  are  de- 
rived; and  there  will,  therefore,  be  little  if  any  ground  for 
attempting  to  differentiate  the  rates  of  the  personal  income 
tax.  Such  differentiation,  furthermore,  would  greatly  compli- 
cate the  administration  of  the  tax,  and  would  lead  to  numerous 
difficulties.  Upon  all  accounts,  therefore,  we  recommend  that 
there  shall  be  no  differentiation  of  the  rate. 

In  the  sixth  place  we  recommend  that  the  rates  of  taxation 
shall  be  progressive,  the  progression  depending  upon  the  amount 
of  the  taxpayer's  net  income.  Concerning  the  precise  schedule 
of  rates,  we  offer  certain  general  recommendations.  The 
lowest  rate  should  not  be  less  than  one  per  cent,  and  under 
present  conditions  we  regard  it  as  inexpedient  for  any  state  to 
impose  a  rate  higher  than  six  per  cent.  The  classes  of  taxable 
income  to  which  the  various  rates  apply  need  not  be  smaller 
than  $1000,  and  probably  should  not  be  larger.  It  results  from 
what  has  been  said  that  if  the  exemption  to  a  single  person  be 
placed  at  $600,  we  would  recommend  a  tax  of  one  per  cent  upon 
any  amount  of  income  between  $600  and  $1600;  a  tax  of  two 
per  cent  upon  any  amount  of  income  betweeen  $1600  and 
$2600;  a  tax  of  three  per  cent  upon  any  amount  of  income 

1  For  administrative  convenience  we  recommend  that,  in  order  to 
minimize  the  number  of  very  small  tax  bills,  no  person  liable  to  pay  an 
income  tax  shall  be  assessed  for  less  than  $1.00. 


215]  APPENDIX  I  215 

between  $2600  and  $3600;  a  tax  of  four  per  cent  upon  any 
amount  of  income  between  $3600  and  $4600 ;  a  tax  of  five  per 
cent  upon  any  amount  of  income  between  $4600  and  $5600 ;  and 
a  tax  of  six  per  cent  upon  all  income  in  excess  of  $5600.  We 
present  these  figures  merely  for  the  purpose  of  illustrating  our 
preferences,  and  make  no  definite  recommendation  except  that 
the  rates  of  the  personal  income  tax  should  be  moderate,  and 
should  be,  as  nearly  as  practicable,  uniform  throughout  the 
United  States. 

Our  seventh  suggestion  concerns  the  administration  of  the 
proposed  tax.  No  argument  can  be  needed  by  the  National 
Tax  Association  to  support  our  recommendation  that  the  ad- 
ministration of  the  personal  income  tax  should  be  placed  in  the 
hands  of  state  officials.  This  we  regard  as  an  indispensable 
condition  for  the  successful  operation  of  any  state  income  tax, 
and  we  should  be  disinclined  to  recommend  the  adoption  of  an 
income  tax  by  any  commonwealth  that  is  unwilling  to  turn  over 
its  administration  to  a  well  organized  and  properly  equipped 
state  tax  department.  Local  administration  of  an  income  tax 
has  never  worked  well,  and  in  our  opinion,  never  can  operate 
satisfactorily.  It  is  obvious,  finally,  that  a  state  tax  com- 
mission, or  commissioner,  is  the  proper  agent  to  administer 
the  proposed  tax ;  and  we  desire  to  record  our  belief  that  satis- 
factory results  are  hardly  to  be  expected  if  the  administration 
is  turned  over  to  any  other  state  officials.  Upon  this  whole 
question  of  administration,  which  is  of  the  most  vital  import- 
ance, we  are  fortunate  in  being  able  to  rely  upon  the  authority 
of  the  opinions  repeatedly  expressed  by  the  conferences  of  the 
National  Tax  Association.  We  are  glad  also  to  point  to  the 
experience  of  Wisconsin  and  Massachusetts. 

Our  eighth  recommendation  is  that  the  personal  income  tax 
be  collected  from  taxpayers,  upon  the  basis  of  strictly  en- 
forced and  controlled  returns,  and  without  any  attempt  to  col- 
lect it  at  the  source.  Upon  this  point  there  might  have  been 
doubt  several  years  ago.  But  the  experience  of  Wisconsin 
and  Massachusetts  shows  conclusively  that,  with  good  admin- 
istration, a  reasonable  tax  upon  incomes  can  be  collected  in 


2l6  APPENDIX  I  [216 

the  manner  we  have  recommended,  with  the  general  cooperation 
of  the  taxpayers  and  with  the  minimum  amount  of  evasion. 
Collection  at  source  presents  serious  administrative  difficulties, 
imposes  unwarranted  burdens  upon  third  parties  in  respect  of 
transactions  which  strictly  concern  only  the  taxpayers  and  the 
government,  and  not  infrequently  tends  to  shift  the  burden  of 
the  tax  to  the  wrong  shoulders.  What  we  seek  is  a  personal 
income  tax  which  shall  not  be  shifted  and  shall  bring  home 
to  the  taxpayer,  in  the  most  direct  possible  form,  his  personal 
obligation  for  the  support  of  the  government  under  which  he 
lives.  Collection  at  the  source  is  plainly  inconsistent  with  the 
purpose  of  such  a  tax.  We  recommend,  however,  that  in 
certain  cases  information  at  the  source  be  required  as  is  now 
done  under  the  Massachusetts  and  Wisconsin  income  taxes.. 
Such  information  is  helpful  to  the  administrative  officials,  and 
does  not  alter  the  incidence  or  otherwise  affect  injuriously  the 
operation  of  a  personal  income  tax. 

Section  13.  The  only  remaining  point  is  that  of  the  proper 
disposition  of  the  proceeds  of  this  tax.  So  far  as  our  general 
plan  of  taxation  is  concerned,  it  is  immaterial  whether  the 
revenue  from  the  personal  income  tax  is  retained  in  the  state 
treasury,  distributed  to  the  local  political  units,  or  divided 
between  the  state  and  local  governments.  It  is  probable,, 
furthermore,  that  the  same  solution  may  not  be  advisable  in 
every  state.  If  the  state  should  keep  the  entire  revenue,  then 
every  section  of  the  state  would  benefit  to  the  extent  that  such 
revenue  might  reduce  the  direct  state  tax.  Upon  the  other 
hand,  if  the  revenue  from  the  income  tax  is  distributed  wholly 
to  the  local  units,  as  is  now  the  case  in  Massachusetts,  the 
lightening  of  local  burdens  tends  to  reduce  the  pressure  of  the 
direct  state  tax.  It  seems  probable  that  in  most  cases  a 
division  of  the  revenue  would  be  considered  preferable;  and 
in  such  cases  we  suggest  that  the  state  governments  might  well 
retain  a  proportion  corresponding  to  the  proportion  which  state 
expenditures  bear  to  the  total  of  the  state  and  local  expendi- 
tures, and  that  the  same  principle  should  apply  in  determining 
the  share  received  by  each  of  the  subordinate  political  units. 


APPENDIX  I 


21? 


Thus  in  case  state  expenditures  amount  to  one-fifth  of  the 
total,  county  expenditures  to  two-fifths,  and  municipal  ex- 
penditures to  two-fifths,  the  state  should  receive  one-fifth  of 
:he  revenue  from  the  income  tax,  the  counties  two-fifths,  and 
the  municipalities  two-fifths.  Whether  distribution  to  the 
local  units  should  be  made  upon  the  basis  of  the  amount  of 
the  tax  collected  in  each  unit,  or  whether  the  tax  should  be 
distributed  upon  some  other  basis,  is  also  immaterial  to  our 
general  plan  of  taxation.  In  states  where  domiciliary  changes 
occurring  under  the  general  property  tax  have  not  produced 
an  unnatural  concentration  of  wealth  in  certain  localities,  it 
will  probably  be  best  to  distribute  the  revenue  according  to  the 
domicile  of  the  taxpayers.  But  where,  as  in  Massachusetts, 
under  the  operation  of  the  general  property  tax,  wealth  has 
been  greatly  concentrated  in  a  few  localities,  such  a  method  of 
distribution  is  obviously  impossible  and  some  other  method 
must  be  found.  In  such  a  case,  the  income  tax  revenue  might 
be  utilized  for  a  state  school  fund,  or  might  be  distributed 
among  the  localities  according  to  the  proportions  in  which 
they  are  required  to  contribute  to  the  direct  state  tax.  Since 
this  entire  question  of  distribution  must  be  so  largely  affected 
by  local  conditions,  the  committee  prefers  to  do  no  more  than 
to  offer  these  general  suggestions. 


APPENDIX  II 
DRAFT  OF  A  PERSONAL  INCOME  TAX  ACT 

PREPARED  FOR  THE  NATIONAL  TAX  ASSOCIATION  BY  THE  COMMITTEE 

APPOINTED  TO  PREPARE  A  PLAN  FOR  A  MODEL  SYSTEM  OF  STATE 

AND  LOCAL  TAXATION.    JANUARY,  1921 

PERSONAL  INCOME  TAX 

AN  ACT  PROVIDING  FOR  THE  LEVYING,  COLLECTING  AND  PAYING 
OF  AN  INCOME  TAX  ON  INDIVIDUALS 


Be  it  Enacted  by  the  Legislature  of  the  State  of 

ARTICLE  I 

SHORT  TITLE  AND  DEFINITIONS 

Section  i.  Short  title.  This  Act  shall  be  known  and  may 
be  cited  as  The  Personal  Income  Tax  Act  of  192 — . 

Sec.  2.  Definitions.  For  the  purposes  of  this  act  and  un- 
less otherwise  required  by  the  context: 

1.  The  words  "tax  commission"  mean  the  state  tax  com- 
mission. 

2.  The  word  "  taxpayer  "  includes  any  individual  or  fiduciary 
subject  to  the  tax  imposed  by  this  act. 

3.  The  word  "  individual "  means  a  natural  person. 

4.  The  word  "  fiduciary  "  means  a  guardian,  trustee,  execu- 
tor, administrator,  receiver,  conservator,  or  any  person,  whether 
individual  or  corporate,  acting  in  any  fiduciary  capacity  for 
any  person,  estate  or  trust. 

5.  The  word  "  person  "  includes  individuals,  fiduciaries,  part- 
nerships and  corporations. 

6.  The  word  "  corporation  "  includes  joint-stock  companies 
or  associations  and  insurance  companies. 

218  [218 


219]  APPENDIX  II  2  j  9 

7.  The  words  "  tax  year  "  mean  the  calendar  year  in  which 
the  tax  is  payable. 

8.  The  words  "  income  year  "  mean  the  calendar  year  or  the 
fiscal  year,  upon  the  basis  of  which  the  net  income  is  computed 
under  this  act ;  if  no  fiscal  year  has  been  established  they  mean 
the  calendar  year. 

9.  The  words  "  fiscal  year  "  mean  an  income  year,  ending  on 
the  last  day  of  any  month  other  than  December. 

10.  The  word  "  paid  "  for  the  purposes  of  the  deductions 
under  this  act,  means  "  paid  or  accrued "  or  "  paid  or  in- 
curred ",   and  the  words  "  paid  or  accrued ",   "  paid  or  in- 
curred "  and  "  incurred  "  shall  be  construed  according  to  the 
method  of  accounting  upon  the  basis  of  which  the  net  income 
is  computed  under  this  act.     The  word  "  received "  for  the 
purpose  of  the  computation  of  the  net  income  under  this  act 
means  "  received  or  accrued ",  and  the  words  "  received  or 
accrued  "  shall  be  construed  according  to  the  method  of  ac- 
counting upon  the  basis  of  which  the  net  income  is  computed 
under  this  act. 

11.  The  word  "resident"  applies  only  to  individuals  and 
includes  for  the  purpose  of  determining  liability  to  the  tax 
imposed  by  this  act,  with  reference  to  the  income  of  any  income 
year,  any  individual  who  shall  be  a  resident  of  the  state  on 
April  15  of  the  tax  year. 

12.  The  words   "  foreign  country "   mean   any  jurisdiction 
other  than  one  embraced  within  the  United  States.     The  words 
"  United  States  ",  when  used  in  a  geographical  sense,  include 
the  states,  the  territories  of  Alaska  and  Hawaii,  the  District  of 
Columbia  and  the  possessions  of  the  United  States. 

ARTICLE  II 
IMPOSITION  OF  TAX 

Sec.  200.  Individuals,  i.  A  tax  is  hereby  imposed  upon 
every  resident  of  the  state,  which  tax  shall  be  levied,  collected 
and  paid  annually,  with  respect  to  his  entire  net  income  as 
herein,  computed  at  the  following  rates,  after  deducting  the 
exemptions  provided  in  this  act: 


220  APPENDIX  II  [22O 

On  the  first  $1000  of  net  income  or  any  part  thereof,  one 
per  cent ; 

On  the  second  $1000  of  net  income  or  any  part  thereof,  two 
per  cent ; 

On  the  third  $1000  of  net  income  or  any  part  thereof,  three 
per  cent ; 

On  the  fourth  $1000  of  net  income  or  any  part  thereof,  four 
per  cent ; 

On  the  fifth  $1000  of  net  income  or  any  part  thereof,  five 
per  cent ; 

On  all  net  income  in  excess  of  $5000,  six  per  cent. 

2.  Such  tax  shall  first  be  levied,  collected  and  paid  in  the  year 
1921  and  with  respect  to  the  net  income  received  during  the 
calendar  dear  1920  or  during  any  income  year  ending  during 
the  twelve  months  ending  March  31,  1921. 

Sec.  201.  Fiduciaries,  i.  The  tax  imposed  by  this  act  shall 
be  imposed  upon  resident  fiduciaries,  which  tax  shall  be  levied, 
collected  and  paid  annually  with  respect  to: 

(a)  That  part  of  the  net  income  of  estates  or  trusts  which 
has  not  been  distributed  or  become  distributable  to  beneficiaries 
during  the  income  year.     In  the  case  of  two  or  more  joint 
fiduciaries,  part  of  whom  are  non-residents  of  the  state,  such 
part  of  the  net  income  shall  be  treated  as  if  each  fiduciary  had 
received  an  equal  share ; 

(b)  The  net  income  received   during  the  income  year  by 
deceased  individuals  who,  at  the  time  of  death  were  residents 
and  who  have  died  on  or  after  April  15  of  the  tax  year  with- 
out having  made  a  return ; 

(c)  The  entire  net  income  of  resident  insolvent  or  incom- 
petent individuals,  whether  or  not  any  portion  thereof  is  held 
for  the  future  use  of  the  beneficiaries,  where  the  fiduciary  has 
complete  charge  of  such  net  income. 

2.  The  tax  imposed  upon  a  fiduciary  by  this  act  shall  be  a 
charge  against  the  estate  or  trust. 


221  ]  APPENDIX  II  221 

ARTICLE  III 

COMPUTATION  OF  TAX 

Sec.  300.  Net  income  defined.  The  words  "  net  income  " 
means  the  gross  income  of  a  taxpayer  less  the  deductions  al- 
lowed by  this  act. 

Sec.  301.  Gross  income  defined,  i.  The  words  "gross 
income "  includes  gains,  profits  and  income  derived  from 
salaries,  wages,  or  compensation  for  personal  service,  of  what- 
ever kind  and  in  whatever  form  paid,  or  from  professions, 
vocations,  trades,  business,  commerce,  or  sales,  or  dealings  in 
property,  whether  real  or  personal,  growing  out  of  the  owner- 
ship or  use  of  or  interest  in  such  property ;  also  from  interest, 
rent,  dividends,  securities,  or  the  transaction  of  any  business 
carried  on  for  gain  or  profit,  or  gains  or  profits  and  income 
derived  from  any  source  whatever.  The  amount  of  all  such 
items  shall  be  included  in  the  gross  income  of  the  income  year 
in  which  received  by  the  taypayer,  unless,  under  the  methods 
of  accounting  permitted  under  this  act,  any  such  amounts  are 
to  be  properly  accounted  for  as  of  a  different  period. 

2.  The  words  "  gross  income,"  does  not  include  the  follow- 
ing items,  which  shall  be  exempt  from  taxation  under  this  act : 

(a)  The  proceeds  of  life-insurance  policies  and  contracts 
paid  upon  the  death  of  the  insured  to  individual  beneficiaries 
or  to  the  estate  of  the  insured ; 

(b)  The   amount  received  by  the  insured  as  a  return  of 
premium  or  premiums  paid  by  him  under  life  insurance,  en- 
dowment or  annuity  contracts,  either  during  the  term  or  at  the 
maturity  of  the  term  mentioned  in  the  contract  or  upon  sur- 
render of  the  contract ; 

(c)  The  value  of  property  acquired  by  gift,  bequest,  devise 
or  descent   (but  the  income  from  such  property  shall  be  in- 
cluded in  gross  income)  ; 

(d)  Interest  upon  the  obligations  of  the  United  States  or 
its  possessions ; 

(e)  Salaries,  wages  and  other  compensation  received  from 
the  United  States  by  officials  or  employees  thereof,  including 
persons  in  the  military  or  naval  forces  of  the  United  States ; 


222  APPENDIX  II  [222 

(f)  Any  amounts  received  through  accident  or  health  insur- 
ance or  under  workmen's  compensation  acts,  as  compensation 
for  personal  injuries  or  sickness,  plus  the  amount  of  any  dam- 
ages received,  whether  by  suit  or  agreement,  on  account  of 
such  injuries  or  sickness. 

Sec.  302.  Basis  of  return  of  net  income,  i.  Taxpayers 
who  customarily  estimate  their  income  on  a  basis  other  than 
that  of  actual  cash  receipts  and  disbursements  may,  with  the 
approval  of  the  tax  commission,  return  their  net  income  under 
this  act  upon  a  similar  basis.  Taxpayers  who  customarily  esti- 
mate their  income  on  the  basis  of  an  established  fiscal  year 
instead  of  on  that  of  the  calendar  year,  may,  with  the  ap- 
proval of  the  tax  commission,  and  subject  to  such  rules  and 
regulations  as  it  may  establish,  return  their  net  income  under 
this  act  on  the  basis  of  such  fiscal  year,  in  lieu  of  that  of  the 
calendar  year. 

2.  A  taxpayer  may,  with  the  approval  of  the  tax  commission 
and  under  such  regulations  as  it  may  prescribe,  change  his 
income  year  from  fiscal  year  to  calendar  year  or  otherwise, 
in  which  case  his  net  income  shall  be  computed  upon  the  basis 
of  such  new  income  year. 

3.  An  individual  carrying  on  business  in  partnership  shall 
be  liable  for  income  tax  only  in  his  individual  capacity  and 
shall  include  in  his  gross  income  the  distributive  share  of  the 
net  income  of  the  partnership  received  by  him  or  distributable 
to  him  during  the  income  year. 

4.  Every  individual,  taxable  under  this  act,,  who  is  a  bene- 
ficiary of  an  estate  or  trust,  shall  include  in  his  gross  income 
the  distributive  share  of  the  net  income  of  the  estate  or  trust, 
received  by  him  or  distributable  to  him  during  the  income  year. 
Unless  otherwise  provided  in  the  law,  the  will,  the  deed  or  other 
instrument  creating  the  estate,  trust  or  fiduciary  relation,  the 
net  income  shall  be  deemed  to  be  distributed  or  distributable 
to  the  beneficiaries  (including  the  fiduciary  as  a  beneficiary,  in 
the  case  of  income  accumulated  for  future  distribution)  ratably, 
in  proportion  to  their  respective  interests. 

Sec.  303.     Determination  of  gain  or  loss.     For  the  purpose 


223]  APPENDIX  II  223 

of  ascertaining  the  gain  or  loss  from  the  sale  or  other  dis- 
position of  property,  real,  personal  or  mixed,  the  basis  shall 

be,  in  the  case  of  property  acquired  before  January  I, , 

the  fair  market  price  or  value  of  such  property  as  of  that  date, 
if  such  price  or  value  exceeds  the  original  cost,  and  in  all  other 
cases,  the  cost  thereof ;  Provided,  that  in  the  case  of  property 
which  was  included  in  the  last  preceding  annual  inventory  used 
in  determining  net  income  in  a  return  under  this  act,  such  in- 
ventory value  shall  be  taken  in  lieu  of  cost  or  market  value. 
The  final  distribution  to  the  taxpayer  of  the  assets  of  a  cor- 
poration shall  be  treated  as  a  sale  of  the  stock  or  securities 
of  the  corporation  owned  by  him  and  the  gain  or  loss  shall 
be  computed  accordingly. 

Sec.  304.  Exchanges  of  property,  i.  When  property  is 
exchanged  for  other  property,  the  property  received  in  exchange 
shall,  for  the  purpose  of  determining  gain  or  loss,  be  treated 
,  as  the  equivalent  of  cash  to  the  amount  of  its  fair  market  value, 
provided  a  market  exists  in  which  all  the  property  so  received 
can  be  disposed  of  at  the  time  of  exchange,  for  a  reasonably 
certain  and  definite  price  in  cash ;  otherwise  such  exchange  shall 
be  considered  as  a  conversion  of  assets  from  one  form  to  an- 
other, from  which  no  gain  or  loss  shall  be  deemed  to  arise. 

2.  In  the  case  of  the  organization  of  a  corporation,  the  stock 
or  securities  received  shall  be  considered  to  take  the  place  of 
property  transferred  therefor  and  no  gain  or  loss   shall  be 
deemed  to  arise  therefrom. 

3.  When,  in  connection  with  the  reorganization,  merger  or 
consolidation  of  a  corporation,  a  taxpayer  receives,  in  place  of 
stock  or  securities  owned  by  him,  new  stock  or  securities,  the 
basis  of  computing  the  gain  or  loss  if  any  shall  be,  in  case  the 

stock  or  securities  owned  were  acquired  before  January  I, , 

the  fair  market  price  or  value  thereof  as  of  that  date,  if  such 
price  or  value  exceeds  the  original  cost,  and  in  all  other  cases 
the  cost  thereof. 

Sec.  305.  Inventory.  Whenever  in  the  opinion  of  the  tax 
commission  the  use  of  inventories  is  necessary  in  order  clearly 
to  determine  the  income  of  any  taxpayer,  inventories  shall  be 


224  APPENDIX  II  [224 

taken  by  such  taxpayer,  upon  such  basis  as  the  tax  commission 
may  prescribe,  conforming  as  nearly  as  may  be  to  the  best 
accounting  practice  in  the  trade  or  business  and  most  clearly 
reflecting  the  income,  and  conforming  so  far  as  may  be,  to  the 
forms  and  methods  prescribed  by  the  United  States  Commis- 
sioner of  Internal  Revenue,  under  the  acts  of  Congress  then 
providing  for  the  taxation  of  incomes. 

Sec.  306.      Deductions,      In  computing  net  income  there 
shall  be  allowed  as  deductions : 

(a)  All  the  ordinary  and  necessary  expenses  paid  during  the 
income  year  in  carrying  on  any  trade  or  business,  including  a 
reasonable  allowance  for  salaries  or  other  compensation  for 
personal  services  actually  rendered,  and  including  rentals  or 
other  payments  required  to  be  made  as  a  condition  to  the 
continued  use  or  possession,  for  the  purposes  of  the  trade  or 
business,  of  property  to  which  the  taxpayer  has  not  taken  or  is 
not  taking  title  or  in  which  he  has  no  equity ; 

(b)  All  interest  paid  during  the  income  year  on  indebtedness ; 

(c)  Taxes  paid  or  accrued  within  the  income  year,  imposed 
by  the  authority  of  the  United  States  or  of  any  of  its  posses- 
sions or  of  any  state,  territory  or  the  District  of  Columbia  or 
of  any  foreign  country ;  except  inheritance  taxes,  and  except 
income  taxes  imposed  by  this  act  and  taxes  assessed  for  local 
benefits,  of  a  kind  tending  to  increase  the  value  of  the  prop- 
erty assessed; 

(d)  Losses  sustained  during  the  income  year  and  not  com- 
pensated for  by  insurance  or  otherwise,  if  incurred  in  trade 
or  business ; 

(e)  Losses  sustained  during  the  income  year  and  not  com- 
pensated for  by  insurance  or  otherwise,   if  incurred  in  any 
transaction  entered  into  for  profit,  though  not  connected  with 
the  trade  or  business ; 

(f )  Losses  sustained  during  the  income  year,  of  property  not 
connected  with  the  trade  or  business,  if  arising  from  fires, 
storms,  shipwreck  or  other  casualty,  or  from  theft,  and  not 
compensated  for  by  insurance  or  otherwise ; 

(g)  Debts  ascertained  to  be  worthless  and  charged  off  with- 


225]  APPENDIX  II  22$ 

in  the  income  year,  if  the  amount  has  previously  been  included 
in  gross  income  in  a  return  under  this  act; 

(h)  A  reasonable  allowance  for  the  depreciation  and  obsoles- 
cence of  property  used  in  the  trade  or  business ;  and,  in  the  case 
of  mines,  oil  and  gas  wells,  other  natural  deposits,  and  timber, 
a  reasonable  allowance  for  depletion;  Provided,  That  in  com- 
puting the  deductions  allowed  under  this  paragraph,  the  basis 
shall  be  the  cost  (including  in  the  case  of  mines,  oil  and  gas 
wells  and  other  natural  deposits,  the  cost  of  development,  not 
otherwise  deducted),  and  in  the  case  of  property  acquired  prior 

to  January  I, ,  the  fair  market  value  of  the  property  (or 

the  taxpayer's  interest  therein)  on  that  date  shall  be  taken  in 
lieu  of  cost  up  to  that  date.  The  reasonable  allowances  under 
this  paragraph  shall  be  made  under  rules  and  regulations  to  be 
prescribed  by  the  tax  commission.  In  the  case  of  leases  the 
deductions  allowed  may  be  equitably  apportioned  between  the 
lessor  and  lessee; 

(i)  In  the  case  of  taxpayers  who  keep  regular  books  of  ac- 
count, upon  an  accrual  basis  and  in  accordance  with  standard 
accounting  practice,  reserve  for  bad  debts  and  for  contingent 
liabilities,  under  such  rules  and  restrictions  as  the  tax  com- 
mission may  impose.  If  the  tax  commission  shall  at  any  time 
deem  the  reserve  excessive  in  amount,  it  may  restore  such  ex- 
cess to  income,  either  in  a*  subsequent  year  or  as  a  part  of  the 
income  of  the  income  year  and  assess  it  accordingly. 

Sec.  307.  Items  not  deductible.  In  computing  net  income 
no  deduction  shall  in  any  case  be  allowed  in  respect  of : 

(a)  Personal,  living  or  family  expenses; 

(b)  Any  amount  paid  out  for  new  buildings  or  for  permanent 
improvements  or  betterments,  made  to  increase  the  value  of 
any  property  or  estate ; 

(c)  Any  amount  expended  in  restoring  property  for  which 
an  allowance  is  or  has  been  made ; 

(d)  Premiums  paid  on  any  life-insurance  policy  covering  the 
life  of  any  officer  or  employee  or  of  any  individual  financially 
interested  in  any  trade  or  business  carried  on  by  the  taxpayer, 
when  the  taxpayer  is  directly  or  indirectly  a  beneficiary  under 
such  policy. 


226  APPENDIX  II  [226 

Sec.  308.  Exemptions,  i.  There  shall  be  deducted  from 
the  net  income  the  following  exemptions : 

(a)  In  the  case  of  a  single  individual,  a  personal  exemption 
of  $1000; 

(b)  In  the  case  of  the  head  of  a  family,  or  a  married  individ- 
ual living  with  husband  or  wife,  a  personal  exemption  of  $2000, 
A  husband  and  wife  living  together  shall  receive  but  one  per- 
sonal exemption  of  $2000  against  their  aggregate  net  income ; 
and  in  case  they  make  separate  returns,  the  personal  exemption 
of  $2000  may  be  taken  by  either  or  divided  between  them ; 

(c)  $200  for  each  individual  (other  than  husband  and  wife) 
dependent  upon  and  receiving  his  chief  support  from  the  tax- 
payer, if  such  dependent  individual  is  under  eighteen  years 
of  age  or  is  incapable  of  self-support,  because  mentally  or 
physically  defective; 

(d)  In  the  case  of  a  fiduciary;  if  taxable  under  clause  (a) 
of  paragraph  I  of  section  201,  a  personal  exemption  of  $1000; 
if  taxable  under  clause  (b)  of  said  paragraph,  the  same  exemp- 
tion as  would  be  allowed  the  deceased,  if  living;  if  taxable 
under  clause  (c)  of  said  paragraph,  the  same  exemptions  to 
which  the  beneficiary  would  be  entitled. 

2.  The  status  on  the  last  day  of  the  income  year  shall  deter- 
mine the  right  to  the  exemptions  provided  in  this  section; 
Provided  that  a  taxpayer  shall  be  entitled  to  such  exemptions 
for  husband  or  wife  or  dependent  who  has  died  during  the 
income  year. 

ARTICLE  IV 
RETURNS 

Sec.  400.  Individual  returns,  i.  Every  resident,  having  a 
net  income  during  the  income  year  of  $1000  or  over,  if  single, 
or  if  married  and  not  living  with  husband  or  wife;  or  having 
a  net  income  for  the  income  year  of  $2000  or  over,  if  married 
and  living  with  husband  or  wife;  shall  make  a  return  under 
oath,  stating  specifically  the  items  of  his  gross  income  and  the 
deductions  and  exemptiqns  allowed  by  this  act. 


227]  APPENDIX  II  227 

2.  If  a  husband  and  wife  living  together  have  an  aggregate 
net  income  of  $2000  or  over,  each  shall  make  such  a  return, 
unless  the  income  of  each  is  included  in  a  single  joint  return. 

3.  If  the  taxpayer  is  unable  to  make  his  own  return,  the 
return  shall  be  made  by  a  duly  authorized  agent  or  by  a  guardian 
or  other  person  charged  with  the  care  of  the  person  or  property 
of  such  taxpayer. 

Sec.  401.  Fiduciary  returns.  I.  Every  fiduciary  subject 
to  taxation  under  the  provisions  of  this  act,  as  provided  in 
section  201  hereof,  shall  make  a  return  under  oath,  for  the 
individual,  estate,  or  trust  for  whom  or  for  which  he  acts,  if 
the  net  income  thereof  amounts  to  $1000  or  over. 

2.  The  return  made  by  a  fiduciary  shall  state  specifically  the 
items  of  gross  income,  and  the  deductions  and  exemptions  al- 
lowed by  this  act  and  such  other  facts  as  the  tax  commission 
may  prescribe.     Under  such  regulations  as  the  tax  commission 
may  prescribe,  a  return  may  be  made  by  one  of  two  or  more 
joint  fiduciaries. 

3.  Fiduciaries  required  to  make  returns  under  this  act  shall 
be  subject  to  all  the  provisions  of  this  act  which  apply  to 
individuals. 

Sec.  402.  Information  at  source.  I.  Every  individual, 
partnership,  corporation,  joint  stock  company  or  association  or 
insurance  company,  being  a  resident  or  having  a  place  of  busi- 
ness in  this  state,  in  whatever  capacity  acting,  including  lessees 
or  mortgagors  of  real  or  personal  property,  fiduciaries,  em- 
ployers and  all  officers  and  employees  of  the  state  or  of  any 
political  subdivision  of  the  state,  having  the  control,  receipt, 
custody,  disposal  or  payment  of  interest  (other  than  interest 
coupons  payable  to  bearer),  rent,  salaries,  wages,  premiums, 
annuities,  compensations,  remunerations,  emoluments  or  other  ' 
fixed  or  determinable  annual  or  periodical  gains,  profits  and 
income,  amounting  to  $1000  or  over,  paid  or  payable  during 
any  year  to  any  taxpayer,  shall  make  complete  return  thereof 
under  oath,  to  the  tax  commission,  under  such  regulations  and 
in  such  form  and  manner  and  to  such  extent  as  may  be  pre- 
scribed by  it. 


228  APPENDIX  II  [228 

2.  Every  partnership,  having  a  place  of  business  in  the  state, 
shall  make  a  return,  stating  specifically  the  items  of  its  gross 
income  and  the  deductions  allowed  by  this  act,  and  shall  include 
in  the  return  the  names  and  addresses  of  the  individuals  who 
would  be  entitled  to  share  in  the  net  income  if  distributed,  and 
the  amount  of  the  distributive  share  of  each  individual.     The 
return  shall  be  sworn  to  by  any  one  of  the  partners. 

3.  Every  fiduciary  shall  make,  under  oath,  a  return  for  the 
individual,  estate  or  trust  for  whom  or  for  which  he  acts,  if 
the  net  income  thereof,  distributed  or  distributable  to  bene- 
ficiaries during  the  year  is  $1000  or  over,  in  which  case  the 
fiduciary  shall  set  forth  in  such  return  the  items  of  the  gross 
income,  the  deductions  allowed  by  this  act,  the  net  income,  the 
names  and  addresses  of  the  beneficiaries,  the  amounts  distri- 
buted or  distributable  to  each  and  the  amount,  if  any,  lawfully 
retained  by  him  for  future  distribution.     Such  return  may  be 
made  by  one  of  two  or  more  joint  fiduciaries. 

Sec.  403.  Time  and  place  of  filing  returns.  Returns  shall 
be  in  such  form  as  the  tax  commission  may  from  time  to  time 
prescribe  and  shall  be  filed  with  the  tax  commission,  at  its  main 
office  or  at  any  branch  office  which  it  may  establish,  on  or  be- 
fore the  fifteenth  day  of  the  fourth  month  next  after  the  pre- 
ceding calendar  year  or  any  income  year  ending  after  such 
calendar  year  and  on  or  before  the  thirty-first  day  of  March. 
In  case  of  sickness,  absence  or  other  disability,  or  whenever 
in  its  judgment  good  cause  exists,  the  tax  commission  may  al- 
low further  time  for  filing  returns.  There  shall  be  annexed 
to  the  return  the  affidavit  or  affirmation  of  the  taxpayer  making 
the  return,  to  the  effect  that  the  statements  contained  therein 
are  true.  The  tax  commission  shall  cause  to  be  prepared  blank 
forms  for  the  said  returns  and  shall  cause  them  to  be  distri- 
buted throughout  the  state  and  to  be  furnished  upon  application, 
but  failure  to  receive  or  secure  the  form  shall  not  relieve  any 
taxpayer  from  the  obligation  of  making  any  return  herein 
required. 

Sec.  404.  Failure  to  file  returns;  supplementary  returns. 
If  the  tax  commission  shall  be  of  the  opinion  that  any  taxpayer 


229]  APPENDIX  II  229 

has  failed  to  file  a  return,  or  to  include  in  a  return  filed,  either 
intentionally  or  through  error,  items  of  taxable  income,  it  may 
require  from  such  taxpayer  a  return,  or  a  supplementary  re- 
turn, under  oath,  in  such  form  as  it  shall  prescribe,  of  all  the 
items  of  income  which  the  taxpayer  received  during  the  year 
for  which  the  return  is  made,  whether  or  not  taxable  under 
the  provisions  of  this  act.  If  from  a  supplementary  return,, 
or  otherwise,  the  tax  commission  finds  that  any  items  of  in- 
come, taxable  under  this  act,  have  been  omitted  from  the 
original  return  it  may  require  the  items  so  omitted  to  be  dis- 
closed to  it,  under  oath  of  the  taxpayer,  and  to  be  added  to 
the  original  return.  Such  supplementary  return  and  the  cor- 
rection of  the  original  return  shall  not  relieve  the  taxpayer  from 
any  of  the  penalties  to  which  he  may  be  liable  under  any  pro- 
vision of  this  act.  The  tax  commission  may  proceed  under 
the  provisions  of  section  502  of  this  act  whether  or  not  it  re- 
quires a  return  or  a  supplementary  return  under  this  section. 

ARTICLE  V 

COLLECTION  AND  ENFORCEMENT  OF  TAX 

Sec.  500.  Time  and  place  of  payment  of  tax.  i.  The  full 
amount  of  the  tax  payable,  as  the  same  shall  appear  from  the 
face  of  the  return,  shall  be  paid  to  the  tax  commission  at  the 
office  where  the  return  is  filed,  at  the  time  fixed  by  law  for  filing 
the  return.  If  the  time  for  filing  the  return  shall  be  extended, 
interest  at  the  rate  of  6  per  cent  per  annum,  from  the  time 
when  the  return  was  originally  required  to  be  filed,  to  the  time 
of  payment,  shall  be  added  and  paid. 

2.  The  tax  may  be  paid  with  uncertified  check,  during  such 
time  and  under  such  regulations  as  the  tax  commission  shall 
prescribe,  but  if  a  check  so  received  is  not  paid  by  the  bank 
on  which  it  is  drawn,  the  taxpayer  by  whom  such  check  is 
tendered  shall  remain  liable  for  the  payment  of  the  tax  and 
for  all  legal  penalties,  the  same  as  if  such  check  had  not  been 
tendered. 

Sec.  501.  Examination  of  returns.  I.  As  soon  as  prac- 
ticable after  the  return  is  filed,  the  tax  commission  shall  examine 


230  APPENDIX  II  [230 

it  and  compute  the  tax,  and  the  amount  so  computed  by  the 
tax  commission  shall  be  the  tax.  If  the  tax  found  due  shall  be 
greater  than  the  amount  theretofore  paid,  the  excess  shall  be 
paid  to  the  tax  commission  within  ten  days  after  notice  of  the 
amount  shall  be  mailed  by  the  tax  commission. 

2.  If  the  return  is  made  in  good  faith  and  the  understate- 
ment of  the  tax  is  not  due  to  any  fault  of  the  taxpayer,  there 
shall  be  no  penalty  or  additional  tax  added  because  of  such  un- 
derstatement, but  interest  shall  be  added  to  the  amount  of  the 
deficiency  at  the  rate  of  i  per  cent  for  each  month  or  fraction 
of  a  month. 

3.  If  the  understatement  is  due  to  negligence  on  the  part  of 
the  taxpayer,  but  without  intent  to  defraud,  there  shall  be 
added  to  the  amount  of  the  deficiency  5  per  cent  thereof,  and 
in  addition,  interest  at  the  rate  of  I  per  cent  per  month  or 
fraction  of  a  month. 

4.  If  the  understatement  is  false  or  fraudulent,  with  intent 
to  evade  the  tax,  the  tax  on  the  additional  income  discovered 
to  be  taxable  shall  be  doubled  and  an  additional  I  per  cent 
per  month  or  fraction  of  a  month  shall  be  added. 

5.  The  interest  provided  for  in  thfe  section  shall  in  all  cases 
be  computed  from  the  date  the  tax  was  originally  due  to  the 
date  of  payment. 

6.  If  the  amount  of  tax  found  due  as  computed  shall  be  less 
than  the  amount  theretofore  paid,  the  excess  shall  be  refunded 
by  the  tax  commission  out  of  the  proceeds  of  the  tax  retained 
by  it  as  provided  in  this  act. 

Sec.  502.  Additional  -taxes.  If  the  tax  commission  dis- 
covers from  the  examination  of  the  return  or  otherwise  that 
the  income  of  any  taxpayer,  or  any  portion  thereof,  has  not 
been  assessed,  it  may,  at  any  time  within  two  years  after  the 
time  when  the  return  was  due,  assess  the  same  and  give  notice 
to  the  taxpayer  of  such  assessment,  and  such  taxpayer  shall 
thereupon  have  an  opportunity,  within  thirty  days,  to  confer 
with  the  tax  commission  as  to  the  proposed  assessment.  The 
limitation  of  two  years  to  the  assessment  of  such  tax  or  addi- 
tional tax  shall  not  apply  to  the  assessment  of  additional  taxes 


23 1  ]  APPENDIX  II  231 

upon  fraudulent  returns.  After  the  expiration  of  thirty  days 
from  such  notification  the  tax  commission  shall  assess  the 
income  of  such  taxpayer  or  any  portion  thereeof  which  it  be- 
lieves has  not  theretofore  been  assessed  and  shall  give  notice 
to  the  taxpayer  so  assessed,  of  the  amount  of  the  tax  and 
interest  and  penalties  if  any,  and  the  amount  thereof  shall  be 
due  and  payable  within  ten  days  from  the  date  of  such  notice. 
The  provisions  of  this  act  with  respect  to  revision  and  appeal 
shall  apply  to  a  tax  so  assessed.  No  additional  tax  amounting 
to  less  than  one  dollar  shall  be  assessed. 

Sec.  503.  Warramt  for  the  collection  of  taxes.  If  any 
tax  imposed  by  this  act  or  any  portion  of  such  tax  be  not  paid 
within  sixty  days  after  the  same  becomes  due,  the  tax  com- 
mission shall  issue  a  warrant  under  its  hand  and  official  seal 
directed  to  the  sheriff  of  any  county  of  the  state,  commanding 
him  to  levy  upon  and  sell  the  real  and  personal  property  of  the 
taxpayer,  found  within  his  county,  for  the  payment  of  the 
amount  thereof,  with  the  added  penalties,  interest  and  the  cost 
of  executing  the  warrant  and  to  return  such  warrant  to  the 
tax  commission  and  pay  to  it  the  money  collected  by  virtue 
thereof  by  a  time  to  be  therein  specified,  not  less  than  sixty 
days  from  the  date  of  the  warrant.  The  sheriff  shall  within 
five  days  after  the  receipt  of  the  warrant,  file  with  the  clerk  of 
his  county  a  copy  thereof,  and  thereupon  the  clerk  shall  enter 
in  the  judgment  docket,  in  the  column  for  judgment  debtors, 
the  name  of  the  taxpayer  mentioned  in  the  warrant,  and  in 
appropriate  columns  the  amount  of  the  tax  or  portion  thereof 
and  penalties  for  which  the  warrant  is  issued  and  the  date 
when  such  copy  is  filed,  and  thereupon  the  amount  of  such 
warrant  so  docketed  shall  become  a  lien  upon  the  title  to  and 
interest  in  real  property  or  chattels  real  of  the  taxpayer 
against  whom  it  is  issued  in  the  same  manner  as  a  judgment 
duly  docketed  in  the  office  of  such  clerk.  The  said  sheriff 
shall  thereupon  proceed  upon  the  same  in  all  respects,  with  like 
effect,  and  in  the  same  manner  prescribed  by  law  in  respect  to 
executions  issued  against  property  upon  judgments  of  a  court 
of  record,  and  shall  be  entitled  to  the  same  fees  for  his  ser- 


232  APPENDIX  II  [232 

vices  in  executing  the  warrant,  to  be  collected  in  the  same 
manner.  If  a  warrant  be  returned  not  satisfied  in  full,  the  tax 
commission  shall  have  the  same  remedies  to  enforce  the  claim 
for  taxes  against  the  taxpayer  as  if  the  people  of  the  state  had 
recovered  judgment  against  the  taxpayer  for  the  amount  of 
the  tax. 

Sec.  504.  Tax  a  debt.  Every  tax  imposed  by  this  act,  and 
all  increases,  interest  and  penalties  thereon,  shall  become,  from 
the  time  it  is  due  and  payable,  a  personal  debt,  from  the  person 
or  persons  liable  to  pay  the  same,  to  the  state  of . 

Sec.  505.  Action  for  recovery  of  'taxes.  Action  may  be 
brought  at  any  time  by  the  attorney  general  of  the  state,  at  the 
instance  of  the  tax  commission,  in  the  name  of  the  state,  to 
recover  the  amount  of  any  taxes,  penalties  and  interest  due 
under  this  act. 

Sec.  506.  Tax  upon  settlement  of  fiduciary's  account. 
I.  No  final  account  of  a  fiduciary  shall  be  allowed  by  the 
probate  court  unless  such  account  shows,  and  the  judge  of 
said  court  finds,  that  all  taxes  imposed  by  the  provisions  of  this 
act  upon  said  fiduciary,  which  have  become  payable,  have  been 
paid,  and  that  all  taxes  which  may  become  due  are  secured 
by  bond,  deposit  or  otherwise.  The  certificate  of  the  tax  com- 
mission and  the  receipt  for  the  amount  of  the  tax  therein 
certified  shall  be  conclusive  as  to  the  payment  of  the  tax,  to 
the  extent  of  said  certificate. 

2.  For  the  purpose  of  facilitating  the  settlement  and  dis- 
tribution of  estates  held  by  fiduciaries,  the  tax  commission, 
with  the  approval  of  the  attorney  general,  may,  on  behalf  of 
the  state  agree  upon  the  amount  of  taxes  at  any  time  due  or  to 
become  due  from  such  fiduciaries  under  the  provisions  of  this 
act,  and  payment  in  accordance  with  such  agreement  shall  be 
full  satisfaction  of  the  taxes  to  which  the  agreement  relates. 

ARTICLE  VI 

PENALTIES 

Sec.  600.  Penalties,  i.  If  any  taxpayer,  without  intent 
to  evade  any  tax  imposed  by  this  act  shall  fail  to  file  a  return 


233]  APPENDIX  II  233 

of  income  or  pay  a  tax,  if  one  is  due,  at  the  time  required  by 
or  under  the  provisions  of  this  act,  but  shall  voluntarily  file  a 
correct  return  of  income  and  pay  the  tax  due  within  sixty  days 
thereafter,  there  shall  be  added  to  the  tax  an  additional  amount 
equal  to  five  per  cent  thereof,  but  such  additional  amount  shall 
in  no  case  be  less  than  one  dollar  and  an  additional  one  per 
cent  for  each  month  or  fraction  of  a  month  during  which  the 
tax  remains  unpaid. 

2.  If  any  taxpayer  fails  voluntarily  to  file  a  return  of  income 
or  to  pay  a  tax  if  one  is  due  within  sixty  days  of  the  time 
required  by  or  under  the  provisions  of  this  act,  the  tax  shall  be 
doubled,  and  such  doubled  tax  shall  be  increased  by  one  per 
cent  for  each  month  or  fraction  of  a  month  from  the  time 
the  tax  was  originally  due  to  the  date  of  payment. 

3.  The  tax  commission  shall  have  power,  upon  making  a 
record  of  its  reasons  therefor,  to  waive  or  reduce  any  of  the 
additional  taxes  or  interest  provided  in  subdivisions  I  and  2  of 
this  section  or  in  subdivisions  2,  3  and  4  of  section  501. 

4.  If  any  taxpayer  fails  to  file  a  return  within  sixty  days 

of  the  time  prescribed  by  this  act,  any  judge  of  the 

court,  upon  petition  of  the  tax  commission,  or  any  ten  taxable 
residents  of  the  state,  shall  issue  a  writ  of  mandamus  requiring 
such  person  to  file  a  return.     The  order  of  notice  upon  the 
petition  shall  be  returnable  not  later  than  ten  days  after  the 
filing  of  the  petition.     The  petition  shall  be  heard  and  deter- 
mined on  the  return  day  or  on  such  day  thereafter  as  the  court 
shall  fix,  having  regard  to  the  speediest  possible  determination 
of  the  case,  consistent  with  the  rights  of  the  parties.      The 
judgment  shall  include  costs  in  favor  of  the  prevailing  party. 
All  writs  and  processes  may  be  issued  from  the  clerk's  office  in 
any  county  and,  except  as  aforesaid,  shall  be  returnable  as 
the  court  shall  order. 

5.  Any  person  who,  without  fraudulent  intent,  fails  to  pay 
any  tax  or  to  make,  render,  sign  or  verify  any  return,  or  to 
supply  any  information,  within  the  time  required  by  or  under 
the  provisions  of  this  act,  shall  be  liable  to  a  penalty  of  not 
more  than  $1000,  to  be  recovered  by  the  attorney  general,  in  the 


234  APPENDIX  II  [234 

name  of   the  people,  by  action  in   any  court  of   competent 
jurisdistion. 

6.  Any  person  or  any  officer  or  employee  of  any  corporation, 
or  member  or  employee  of  any  partnership,  who,  with  intent 
to  evade  any  requirement  of  this  act  or  any  lawful  require- 
ment of  the  tax  commission  thereunder,  shall  fail  to  pay  any 
tax  or  to  make,  sign  or  verify  any  return  or  to  supply  any 
information  required  by  or  under  the  provisions  of  this  act,  or 
who,  with  like  intent,  shall  make,  render,  sign  or  verify  any 
false  or  fraudulent  return  or  statement,  or  shall  supply  any 
false  or  fraudulent  information,  shall  be  liable  to  a  penalty  of 
not  more  than  $1000,  to  be  recovered  by  the  attorney  general  in 
the  name  of  the  people,  by  action  in  any  court  of  competent 
jurisdiction,  and  shall  also  be  guilty  of  a  misdemeanor  and 
shall,  upon  conviction,  be  fined  not  to  exceed  $1000  or  be  im- 
prisoned not  to  exceed  one  year,  or  both,  at  the  discretion 
of  the  court. 

7.  The  attorney  general  shall  have  the  power,  with  the  con- 
sent of  the  tax  commission,  to  compromise  any  penalty  for 
which  he  is  authorized  to  bring  action  under  subdivisions  5  and 
6  of  this  section.     The  penalties  provided  by  such  subdivisions 
shall  be  additional  to  all  other  penalties  in  this  act  provided. 

8.  The  failure  to  do  any  act  required  by  or  under  the  pro- 
visions of  this  act  shall  be  deemed  an  act  committed  in  part 
at  the  office  of  the  tax  commission  in  .     The  certifi- 
cate of  the  tax  commission  to  the  effect  that  a  tax  has  not 
been  paid,  that  a  return  has  not  been  filed  or  that  information 
has  not  been  supplied,  as  required  by  or  under  the  provisions 
of  this  act,  shall  be  prima-facie  evidence  that  such  tax  has  not 
been  paid,  that  such  return  has  not  been  filed  or  that  such  in- 
formation has  not  been  supplied. 

9.  If  any  taxpayer,  who  has  failed  to  file  a  return  or  has 
filed  an  incorrect  or  insufficient  return  and  has  been  notified 
by  the  tax  commission  of  his  delinquency,  refuses  or  neglects 
within  twenty  days  after  such  notice  to  file  a  proper  return,  or 
files  a  fraudulent  return,  the  tax  commission  shall  determine 
the  income  of  such  taxpayer  according  to  its  best  information 


235]  APPENDIX  II  235 

and  belief  and  assess  the  same  at  not  more  than  double  the 
amount  so  determined.  The  tax  commission  may  in  its  dis- 
cretion allow  further  time  for  the  filing  of  a  return  in  such  case. 

ARTICLE  VII 

REVISION  AND  APPEAL 

Sec.  700.  Revision  by  tax  commission.  A  taxpayer  may 
apply  to  the  tax  commission  for  revision  of  the  tax  assessed 
against  him,  at  any  time  within  one  year  from  the  time  of  the 
filing  of  the  return  or  from  the  date  of  the  notice  of  the  assess- 
ment of  any  additional  tax.  The  tax  commission  shall  grant 
a  hearing  thereon  and  if,  upon  such  hearing,  it  shall  determine 
that  the  tax  is  excessive  or  incorrect,  it  shall  resettle  the  same 
according  to  the  law  and  the  facts  and  adjust  the  computation 
of  tax  accordingly.  The  tax  commission  shall  notify  the 
taxpayer  of  its  determination  and  shall  refund  to  the  taxpayer 
the  amount,  if  any,  paid  in  excess  of  the  tax  found  by  it  to  be 
due.  If  the  taxpayer  has  failed,  without  good  cause,  to  file 
a  return  within  the  time  prescribed  by  law,  or  has  filed  a 
fraudulent  return  or,  having  filed  an  incorrect  return,  has  failed, 
after  notice,  to  file  a  proper  return,  the  tax  commission  shall 
not  reduce  the  tax  below  double  the  amount  for  which  the  tax- 
payer is  found  to  be  properly  assessed. 

Sec.  701.  Appeal.  The  determination  of  the  tax  commis- 
sion upon  any  application  made  by  a  taxpayer  for  revision  of 
any  tax,  may  be  reviewed  in  any  court  of  competent  juris- 
diction by  a  complaint  filed  by  the  taxpayer  against  the  tax 
commission  in  the  county  in  which  the  taxpayer  resides  or  has 
his  principal  place  of  business,  within  thirty  days  after  notice 
by  the  tax  commission  of  its  determination,  given  as  provided 
in  section  700  of  this  act.  Thereupon,  appropriate  proceedings 
shall  be  had  and  the  relief,  if  any,  to  which  the  taxpayer  may 
be  found  entitled  may  be  granted  and  any  taxes,  interest  or 
penalties  paid,  found  by  the  court  to  be  in  excess  of  those 
legally  assessed,  shall  be  ordered  refunded  to  the  taxpayer, 
with  interest  from  time  of  payment. 


236  APPENDIX  II  [236 

ARTICLE  VIII 

* 

ADMINISTRATION 

Sec.  800.   Tax  commission  to  administer  this  act;  districts. 

The  tax  commission  shall  administer  and  enforce  the  tax  herein 
imposed,  for  which  purpose  it  may  divide  the  state  into  districts, 
in  each  of  which  a  branch  office  of  the  tax  commission  may  be 
established.  It  may  from  time  to  time  change  the  limits  of 
such  districts. 

Sec.  801.  Powers  of  tax  commission.  The  tax  commis- 
sion, for  the  purpose  of  ascertaining  the  correctness  of  any 
return  or  for  the  purpose  of  making  an  estimate  of  the  taxable 
income  of  any  taxpayer,  shall  have  power  to  examine  or  cause 
to  be  examined  by  any  agent  or  representative  designated  by 
it  for  that  purpose,  any  books,  papers,  records  or  memoranda, 
bearing  upon  the  matters  required  to  be  included  in  the  return, 
and  may  require  the  attendance  of  the  taxpayer  or  of  any  other 
person  having  knowledge  in  the  premises,  and  may  take  testi- 
mony and  require  proof  material  for  its  information,  with 
power  to  administer  oath  to  such  person  or  persons. 

Sec.  802.  Officers,  agents  and  employees,  i.  The  tax 
commission  may  appoint  and  remove  a  person  to  be  known  as 
the  income  tax  director  who,  under  its  direction  shall  have 
supervision  and  control  of  the  assessment  and  collection  of 
the  income  taxes  provided  in  this  act ;  the  tax  commission  may 
also  appoint  such  other  officers,  agents,  deputies,  clerks  and 
employees  as  it  may  deem  necessary,  such  persons  to  have  such 
duties  and  powers  as  the  tax  commission  may  from  time  to 
time  prescribe. 

2.  The  salaries  of  all  officers,  agents  and  employees  em- 
ployed by  the  tax  commission  shall  be  such  as  it  may  prescribe, 
not  to  exceed  such  amounts  as  may  be  appropriated  therefor 
by  the  legislature,  and  the  members  of  the  tax  commission  and 
such  officers,  agents  and  employees  shall  be  allowed  such  rea- 
sonable and  necessary  traveling  and  other  expenses  as  may  be 
incurred  in  the  performance  of  their  duties,  not  to  exceed  the 
amounts  appropriated  therefor  by  the  legislature. 


237]  APPENDIX  II  237 

3.  The  tax  commission  may  require  such  of  the  officers, 
agents  and  employees  as  it  may  designate,  to  give  bond  for  the 
faithful  performance  of  their  duties  in  such  sum  and  with 
such  sureties  as  it  may  determine,  and  all  premiums  on  such 
bonds  shall  be  paid  by  the  tax  commission  out  of  monies 
appropriated  for  the  purpose  of  this  act. 

Sec.  803.  Oaths  and  acknowledgments.  The  members 
of  the  tax  commission  and  such  officers,  as  it  may  designate, 
shall  have  the  power  to  administer  an  oath  to  any  person  or  to 
take  the  acknowledgment  of  any  person  in  respect  of  any  return 
or  report  required  by  this  act  or  the  rules  and  regulations  of 
the  tax  commission. 

Sec.  804.  Publication  of  statistics.  The  tax  commission 
shall  prepare  and  publish  annually  statistics  reasonably  avail- 
able, with  respect  to  the  operation  of  this  act,  including  amounts 
collected,  classifications  of  taxpayers,  income  and  exemptions, 
and  such  other  facts  as  are  deemed  pertinent  and  valuable. 

Sec.  805.  Secrecy  required  of  officials;  penalty  for 
violation,  i.  Except  in  accordance  with  proper  judicial  order 
or  as  otherwise  provided  by  law,  it  shall  be  unlawful  for  the 
members  of  the  tax  commission,  any  deputy,  agent,  clerk  or 
other  officer  or  employee,  to  divulge  or  make  known  in  any 
manner  the  amount  of  income  or  any  particulars  set  forth  or 
disclosed  in  any  report  or  return  required  under  this  act. 
Nothing  herein  shall  be  construed  to  prohibit  the  publication 
of  statistics,  so  classified  as  to  prevent  the  identification  of 
particular  reports  or  returns  and  the  items  thereof,  or  the 
inspection  by  the  attorney  general  or  other  legal  representatives 
of  the  state,  of  the  report  or  return  of  any  taxpayer  who  shall 
bring  action  to  set  aside  or  review  the  tax  based  thereon,  or 
against  whom  an  action  or  proceeding  has  been  instituted  to 
recover  any  tax  or  any  penalty  imposed  by  this  act.  Reports 
and  returns  shall  be  preserved  for  three  years  and  thereafter, 
until  the  tax  commission  orders  them  to  be  destroyed. 

2.  Any  offense  against  subdivision  one  of  this  section  shall 
be  punished  by  a  fine  of  not  exceeding  one  thousand  dollars 
or  by  imprisonment  not  exceeding  one  year,  or  both,  at  the 


238  APPENDIX  II  [238 

discretion  of  the  court,  and  if  the  offender  be  an  officer  or 
employee  of  the  state,  he  shall  be  dismissed  from  office  and  be 
incapable  of  holding  any  public  office  in  this  state  for  a  period 
of  five  years  thereafter. 

3.  Notwithstanding  the  provisions  of  this  section,  the  tax 
commission  may  permit  the  commissioner  of  internal  revenue 
of  the  United  States,  or  the  proper  officer  of  any  state  imposing 
an  income  tax  upon  the  incomes  of  individuals,  or  the  au- 
thorized representative  of  either  such  officer,  to  inspect  the 
income  tax  returns  of  any  individual,  or  may  furnish  to  such 
officer  or  his  authorized  representative  an  abstract  of  the  return 
of  income  of  any  taxpayer  or  supply  him  with  information  con- 
cerning any  item  of  income  contained  in  any  return,  or  dis- 
closed by  the  report  of  any  investigation  of  the  income  or  re- 
turn of  income  of  any  taxpayer;  but  such  permission  shall  be 
granted  or  such  information  furnished  to  such  officer  or  his 
representative,  only  if  the  statutes  of  the  United  States  or  of 
such  other  state,  as  the  case  may  be,  grant  substantially  similar 
privileges  to  the  proper  officer  of  this  state  charged  with  the 
administration  of  the  personal  income  tax  law  thereof. 

Sec.  806.  Regulations.  The  tax  commission  may  from 
time  to  time  make  such  rules  and  regulations,  not  inconsistent 
with  this  act,  as  it  may  deem  necessary  to  enforce  its  provisions. 

ARTICLE  IX 

MISCELLANEOUS 

Sec.  900.     Distribution  of  the  income  tax. 

[Provision  should  be  made  whereby  the  proper  officials  shall 
be  notified  concerning  the  amount  each  locality  is  to  receive 
from  the  income  tax,  in  time  to  enable  them  to  take  account  of 
such  receipts  when  determining  the  amount  of  the  local  tax 
levied  in  each  year. 

Care  should  be  taken  to  provide  that  a  reasonable  amount 
be  withheld  from  distribution  to  the  state  or  to  the  localities, 
in  order  to  enable  the  commission  to  promptly  make  refunds 
to  which  taxpayers  are  found  to  be  entitled. 


239]  APPENDIX  II  239 

For  purposes  of  reference,  the  following  methods  of  distri- 
bution contained  in  the  statutes  of  various  states  having  income 
tax  laws,  may  be  useful : 

Delaware,  L.  1917,  Ch.  8;  1919,  Ch.  157,  Art.  14,  §  212. 

Mass.,  L.  1917,  Ch.  209,  317,  339;  1918,  Ch.  107,  154,  219; 
1919,  Ch.  314,  §  i ;  Ch.  363,  Part  I. 

N.  Y.9  L.  1920,  Ch.  694. 

Wise.,  L.  1917,  Ch.  485.] 

Sec.  901.  Exemption  of  intangible  personal  property 
from  taxation. 

[Provision  should  be  made  for  exempting  intangible  per- 
sonal property  from  taxation  under  the  property  tax,  as  recom- 
mended in  the  Preliminary  Report  of  the  committee.  The 
wording  of  such  a  provision  will  necessarily  have  to  depend 
upon  the  language  employed  in  the  tax  law  of  each  state,  and 
no  provision  can  possibly  be  drawn  which  will  be  applicable 
to  all  states.  The  importance  of  providing  for  such  exemption 
is  so  great  that  the  committee  feels  obliged  to  record  here  its 
belief  that  a  personal  income  tax  cannot  be  expected  to  operate 
satisfactorily  in  a  state  which  continues  to  tax  intangible  per- 
sonal property  under  the  property  tax. 

For  purposes  of  reference,  the  following  exemption  pro- 
visions, contained  in  the  statutes  of  various  states  having  in- 
come tax  laws,  may  be  useful : 

Mass.,  L.  1918,  Ch.  257,  §  69. 

N.  Y.,  L.  1920,  Ch.  120. 

No.  Dak.,  L.  1919,  Spec.  Sess.,  Ch.  62. 

Wis.,  L.  1911,  Ch.  658,  Sees.  2  &  3  (p.  999).] 

Sec.  902.  Contract  to  assume  tax  illegal.  It  shall  be  un- 
lawful for  any  person  to  agree  or  contract  directly  or  indirectly 
to  pay  or  assume  or  bear  the  burden  of  any  tax  payable  by  any 
taxpayer  under  the  provisions  of  this  act.  Any  such  contract 
or  agreement  shall  be  null  and  void  and  shall  not  be  enforced 
or  given  effect  by  any  court. 

Sec.  903.  Unconstitutionality  or  invalidity.  If  any 
clause,  sentence,  paragraph,  or  part  of  this  act  shall,  for  any 
reason,  be  adjudged  by  any  court  of  competent  jurisdiction  to 


240  APPENDIX  II  [240 

be  invalid,  such  judgment  shall  not  affect,  impair,  or  invalidate 
the  remainder  of  this  act,  but  shall  be  confined  in  its  operation 
to  the  clause,  sentence,  paragraph  or  part  thereof  directly  in- 
volved in  the  controversy  in  which  such  judgment  shall  have 
been  rendered.  No  caption  of  any  section  or  set  of  sections 
shall  in  any  way  affect  the  interpretation  of  this  act  or  any 
part  thereof. 

Sec.  904.  Taking  effect  of  the  act.  This  act  shall  take 
effect  on . 

[Since  several  months  are  required  for  the  work  preliminary 
to  the  assessment  of  an  income  tax,  the  date  at  which  the  law 
becomes  effective  ought  to  be  such  as  to  leave  sufficient  time 
for  such  work.] 


BIBLIOGRAPHY 

GENERAL  WORKS 

Adams,  H.  C,  Science  of  Finance  (New  York,  1809). 

Black,  H.  C,  Treatise  on  the  Law  of  Income  Taxation  (Kansas  City, 

1915)- 

Ely,  R.  T.,  Taxation  in  American  States  and  Cities  (New  York,  1888). 
Kennan,  K.  K.,  Income  Taxation  (Milwaukee,  1910). 
Kinsman,    D.   O.,    The   Income    Tax  in   the   Commonwealths   of   the 

United  States  (New  York,  1903). 

Montgomery,  R.  H.,  Income  Tax  Procedure  (New  York,   1920). 
Plehn,  C.  C.,  Introduction  to  Public  Finance  (4th  ed.,  New  York,  1920). 
iSeligman,  E.  R.  A.,  The  Income  Tax  (Revised  ed.,  New  York,  1914). 
Seligman,    E.    R,    A.,   Progressive    Taxation   in    Theory   and  Practice 

(Revised  ed.,  New  York,  1918). 
Wells,  D.  A.,  Theory  and  Practice  of  Taxation  (New  York,  1900). 

OFFICIAL  REPORTS 

'California: 

Commission  on  'Revenue  and  Taxation,  Report,  1906. 
Connecticut : 

Tax  Commissioner,  Biennial  Report,  1918. 
Delaware : 

State  Treasurer,  Reports,  1917,  1919. 
Georgia : 

Special  Revenue  Commission),  Report,  1920. 
Massachusetts : 

Commission  appointed  to  inquire  into  the  Expediency  of  Revising 

and  Amending  the  Laws  of  the  Commonwealth  relating  to  Tax- 
ation, Report,  1897. 

Joint  Special  Committee  on  Taxation,  Report,  1919.. 

Tax  Commissioner,  Reports,  1917-1921. 
Mississippi : 

Senate  and   House   Committee   to   Consider  the   State's   Revenue 

System  and  Fiscal  Affairs,  Report,  1918. 

Tax  Commission,  Reports,  1917,  1919. 

241]  241 


242  BIBLIOGRAPHY  [242 

New  Mexico: 

Special  Revenue  Commission,  Report,  1920. 

Tax  Commission,  Report,  1920. 
New  York: 

Comptroller,  Report,  1920. 

Joint  Legislative  Committee,  Report,  1916. 

.Special  Joint  Committee  on  Taxation  and  Retrenchment,  Report, 

1921. 

State  Tax  Commission,  Reports,  1918,  1919, 
North  Carolina : 

State  Tax  Commission,  Report,  1919. 

State  Treasurer,  Report,  1920. 
North  Dakota: 

Tax  Commissioner,  Report,  1920. 
Ohio: 

Special  Joint  Taxation  Committee,  Report,  1919. 
Oklahoma : 

State  Auditor,  Report,  1912, 
South  Carolina : 

Joint  Special  Committee  on  Revenue  and  Taxation,  Report,  1921. 

Tax  Commission,  Reports,  1915,  1917. 
United  States: 

Bureau  of  the  Census,  Financial  Statistics  of  States,  1918,  1919. 

Internal  Revenue,  Statistics  of  Income,  1917,  1918. 
Virginia : 

Auditor  of  Public  Accounts,  Reports,  1917,  1918. 
Wisconsin : 

State  Tax  Commission,  Reports,  1912-1920. 

Treasurer,  Report,  1918. 

SIGNED  ARTICLES 

Adams,   T.   &.,    "The  Significance   of   the   Wisconsin   Income   Tax," 

Political  Science  Quarterly,  vol.  xxviii,  no.  4  (Dec.  1913). 
Adams,   T.  S.,   "The   Wisconsin   Income  Tax,"   American   Economic 

Review,  vol.  i,  no.  4  (Dec.  1911). 
Bullock,  C.  J.,  "Operation  of  the  Massachusetts  Income  Tax  Law," 

Quarterly  Journal  of  Economics,  vol.  xxxii,  no.  3  (May,  1918). 
Bullock,  C.  J.,  "  Taxation  of  Property  and  Income  in  Massachusetts," 

Quarterly  Journal  of  Economics,  vol.  xxxi,  no.  I  (Nov.  1916). 
Kennan,  K.  K.,  "  The  Wisconsin  Income  Tax,"  Annals  of  the  American 

Academy  of  Political  and  Social  Science,  vol.  Iviii   (1915). 
Kinsman,  D.  O.,  "The  Present  Period  of  Income  Tax  Activity  in  the 

American  States,  Quarterly  Journal  of  Economics,  vol.  xxiii,  no. 

2  (Feb.  1909). 


BIBLIOGRAPHY 

Lutz,  H.  L,,  "The  Progress  of  State  Income  Taxation  cmce  1911,'* 
American  Economic  Review,  vol.  x,  no.  I  (March,  1920). 

Lyons,  T.  E.,  "  The  Wisconsin  Income  Tax,"  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  vol.  Iviii  (1915). 

Plehn,  C.  C.  "  An  Assessment  Roll  for  the  Income  Tax,"  Journal  of 
Political  Economy,  vol.  xxvii,  no.  10  (Dec.  1919). 

Seligman,  E.  R.  A.,  "  The  New  York  Income-Tax,"  Political  Science 
Quarterly,  vol.  xxxiv,  no.  4  (Dec.  1919). 

Seligman,  E.  R.  A.,  "  Are  Stock  Dividends  Income,"  American 
Economic  Review,  vol.  ix,  no.  3  (Sept.  1919). 

Shelton,  W.  A.,  "The  Income  Tax  in  Georgia,"  Journal  of  Political 
Economy,  vol.  xviii,  no.  8  (Oct.  1910). 

Sydenstricker,  E.,  "  A  Brief  History  of  Taxation  in  Virginia,"  Legisla- 
tive Reference  Bureau  of  Virginia,  1915. 

PROCEEDINGS  AND  BULLETINS 

Bulletin  of  the  National  Tax  Association  (New  York). 
Proceedings  of  the  National  Tax  Association  (1918-1921). 
Proceedings  of  the  New  York  State  Conference  on  Taxation  (1919). 


INDEX 


Ability  taxation,  52 

Adams,  26,  36 

Administration,    18,    39,    115,    134, 

190  ff 

Agricultural  gains,  89 
Alabama  income  tax,  14,   153   ff; 

unconstitutionally  of,  155 
Annuities,  73 
Assessment  of  income  tax,  193 

Bond,  32 

Brooks,  162 

Bullock,  23,  25,  26,  68,  72,  74,  no, 

130 
Business  tax,  27,  55,  109 

California,    income  tax   proposals 

in,  162 

Chandler,  106,  109 
Collection,  at  source,  116,  137,  1139, 

197  ff;   cost  of,  47,   58,  64,  79, 

91,  95,  126 
Connecticut,    corporation     income 

tax,  i8n,  25,  186;  faculty  tax,  13 
Credit,      for     personal     property 

taxes,     147;     to    non-residents, 

122,  183 

Dahl,  35 

Davenport  Committee,  no 

Deductions,  179  ff 

Delaware,  facuty  tax,  13;  income 

tax,  89  ff,  201,  203 
Differentiation,  83,    114,   141,    166, 

168  ff 
Distribution,  41,  75,  91,  n8ff,  159, 

201  ff 

Divilends,  taxation  of,  113 
Double  taxation,  139,  184  ff 

"  Earned  "  income,  128,  136,  168 
Education,  exemption  for,  177 
Educational      needs,      distribution 

according  to,  201 
Elasticity,  76 
Emerson  law,  108 

245] 


European  War,  n,  95 
Exemptions,  171  ff 

Faculty  taxes,  12,  93,  97 
Florida  income  tax,  14 

General  property  tax,  16,  68,  104 

Georgia  income  tax,  14,  160 

Gifts,  180 

Goodrich  case,  132 

Graduation,  166 

Graves,  116 

Great   Britain,  collection  in,   198; 

differentiation   in,    169;    exemp- 

tions in,  175 

Haugen,  34n,  35 

Holcomb,  9in,  Q2n,  I2on,  130,  204, 

205 

Holmes,  32 
Husting,  35 

Income    tax,    federal,    21,   47,    78, 

125,    176,    198;    Norwegian,   36; 

Prussian,  36,  184 
Indiana,    income    tax    amendment 

in,  164 
Information  at  source,  40,  74,  116, 

118,  J97ff 
Ingram,  35 

Intangibles,  tax  on,  72,  73,  82 
Investment  income,  128,  169 

James,  io6n, 


Kansas,  income  tax  proposed  in, 

165 

Kennan,  20,  36,  43n 
Kentucky,  income  tax  in,  15 
Kinsman,  18,  36 

Louisiana,  income  tax  in,  15 
Lutz,  33,  77n,  157 

McGovern,  37 

Maine,   income  tax   proposed   in, 
165 

245 


246 


INDEX 


[246 


Maryland,  faculty  tax  in,  13 
Massachusetts,    faculty    tax,     12; 
income  tax,  64  ff,  185 ;  personal 
property  tax,  68 

Massachusetts  Tax  Association,  72 
Mayor's  'Committee,  106,  107 
Mayors,  Conference  of,  119 
Mills,  26 

Mills  Committee,  106,  107 
Milwaukee  Free  Press,  35 
Minnesota,  income  tax  proposed 

in,  164 

Mississippi  income  tax,  17,  57  ff 
Missouri  income  tax,  14,  86  ff 
Missouri    Supreme   Court   on   in- 
come tax,  87 
Model  tax  law,  26  ff 
Montana,  corporation  income  tax 
in,  i8n,  25 

National  Tax  Association,  26, 
196;  conference,  27,  32,  120; 
Committee  on  a  Model  System 
of  State  and  Local  Taxation, 
26,  56,  109,  in,  112,  130,  140, 
157,  170,  174,  182,  184,  185,  195, 
205 

New  Day  in  North  Dakota,  138 

New  Hampshire,  faculty  tax,  13; 
income  tax  proposed  in,  163 

New  Jersey,  faculty  tax,  13;  in- 
come tax  proposed  in,  165 

New  Mexico  income  tax,  17,  149  ff 

New  York,  corporation  income 
tax,  i8n,  25,  109;  corporation 
tax,  105 ;  franchise  tax,  108  ; 
general  property  tax,  104;  in- 
come tax,  17,  103,  104  ff,  118, 
125 ;  inheritance  tax,  105 ;  per- 
sonal property  tax,  105,  115 

Non-residents,  taxation  of,  84, 
115,  120,  129,  183,  189 

North  Carolina  income  tax,  14, 
loo  ff,  173 

North  Dakota  income  tax,  17,  138 
ff,  169,  173 

Ohio,  income  tax  proposed  in,  156 
Oklahoma  income  tax,  15,  57,  62ff, 

129,  173 
Oregon,  income  tax  proposed  in, 

165 


Pennsylvania,  faculty  tax,  13;  in- 
come tax,  14 

Personal  income  tax,  recommend- 
ed .by  Committee  on  Model 
Taxation,  27 

Personal  property  tax  offset,  38, 
51,  137,  149,  182 

Pitney,  123 

Plehn,  196,  I99n 

Powell,  logn 

Privilege  taxes  in  Mississippi,  60 

Professional  incomes,  93 

Progression,  in,  167 

Rhode  Island  faculty  tax,  13 

Seligman,  21,  22,  25,  105,  106,  107, 
no,  120,  122,  I2gn,  184,  206 

Soldiers'  bonus,  43,  81 

South  Carolina,  faculty  tax,  13; 
income  tax,  15,  96  ff 

Stock  dividends,  179 

Stock  sales,  132 

"  Stoppage  "  at  source,  197 

Supreme  Court,  U.  S.,  on  income 
tax,  44,  64,  123,  129 

Surplus,  income  tax  as,  126 

Tangible  property,  tax  on,  27 

Tanzer,  no 

Texas,  income  tax  in,  15 

"  Unearned  "  income,  84,  128,  136, 

168,  169 

Uniformity  in  taxation,  187 
Utah,  income  tax  proposed  in,  165 

Vermont,  faculty  tax,  13 
Virginia,    faculty  tax,    13,  93;   in- 
come tax,  14,  93  ff 

West  Virginia,  corporation  in- 
come tax,  i8n,  25;  income  tax, 
IS 

Wisconsin,  corporation  income 
tax,  39,  55;  income  tax,  17,  34  ff, 
7i,  77,  J77 

Withholding  at  source,  197 

Yale  and  Towne  Manufacturing 
Company,  122 


VITA 


THE  writer  was  born  at  Waterford,  Connecticut,  on 
November  23,  1888.  She  was  graduated  from  Mount 
Holyoke  College  in  1910  with  the  degree  of  A.B.  In  1912 
she  received  the  degree  of  A.M.  from  Columbia  University. 
Graduate  work  was  continued  at  Columbia  in  the  School 
of  Political  Science  in  1916  and  1917,  chiefly  under  Pro- 
fessors Seligman,  Mitchell,  and  Giddings.  She  attended 
the  seminar  conducted  by  Professors  Seligman  and  Mitchell. 

The  writer  also  studied  at  Harvard  under  Professor  Gay 
in  the  summer  of  1914  and  at  the  University  of  London  in 
1919,  where  she  attended  courses  conducted  by  Professors 
Cannan  and  Bowley. 

In  1913  she  was  appointed  instructor  in  Economics  and 
Sociology  at  Mount  Holyoke  College,  where  she  became 
associate!  professor  in  1917.  She  has  published  "Pro- 
posals for  the  Taxation  of  Wealth  in  Great  Britain,"  in 
the  Journal  of  Political  Economy  for  May,  1920;  "  Fiscal 
Aspects  of  State  Income  Taxes,"  in  the  American  Economic 
Review  for  June,  1920;  "British  Income  Tax  Reform," 
in  the  American  Economic  Review  for  September,  1920; 
and  other  articles  on  taxation  in  the  Bulletin  of  the 
National  Tax  Association. 

247 


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